- Most homeowners insurance policies can cover 16 hazards or perils that could damage your home and belongings.
- Unless you add coverage, belongings included under most homeowners policies are for their current cash value after depreciation—not replacement value.
- Homeowners insurance isn’t just for homeowners: A tenants policy can cover you if you rent an apartment or home.
- Floods and earthquakes are excluded from standard homeowners insurance policies.
It’s easy to think of homeowners insurance as a one-size-fits-all safety net. But there are multiple policies designed to protect different types of homes and situations. And whether you’re a first-time homebuyer or a seasoned veteran going on your fifth home, there’s always the possibility of unforeseen damage. How you decide on an insurance policy depends on how much protection you think you might need against certain hazards, perils or accidents that could happen on your property.
According to a report from the National Association of Insurance Commissioners (NAIC), the average homeowners insurance premium is $1,249 a year. That can take a chunk out of your annual budget, but it’s also a necessary evil as a homeowner. So it’s important to understand what each type of policy covers (they’re referred to as HO-1 through HO-5 in the industry) so you can choose the right one depending on your needs. Here’s a look at how they work:
Inside this article
HO-1: The bare-bones policy
HO-1 homeowners insurance is the most basic version of coverage. It’s more limited than other forms of insurance because the policy only includes coverage for “named” perils, or the problems or hazards that are specifically listed on the policy. There are only 10 named perils on the list, compared to other policies that have 16. An HO-1 usually costs less, because it offers less protection. While it does cover your home and belongings in case your home suffers damage from the perils listed in the policy, the coverage is usually not enough to rebuild your home or replace your belongings. The perils HO-1 policies cover are:
Fire or lightning
Riot or civil commotion
Windstorm or hail
Tip: An HO-1 policy is not as popular as other types: If you hold a mortgage, an HO-1 is usually not recommended since most lenders will require more coverage; it’s also not available in all states.
HO-2: The basic policy
HO-2 homeowner coverage includes six perils in addition to those in an HO-1 policy—for a total of 16—but that’s pretty much the only difference. An HO-2 policy is also a “named” perils policy, thus not as comprehensive as other types that cover more risk. Since policies with more coverage are available for close to the same rates, HO-2 policies are no longer as common.
HO-3: The standard policy
An HO-3 insurance policy is the standard for single-family residences and contains coverage that’s midway between the barebones of an HO-1 and the full coverage of an HO-5 (see below). The key difference from HO-1 and HO-2 is that an HO-3 is an “open” perils policy for your home, meaning your home is covered unless the hazard is listed in your policy as an exclusion. However, your personal property would fall under “named” perils coverage.
In short, an HO-3 covers your house and belongings, and includes coverage for liability expenses if you’re legally responsible for an injury that occurs on your property. Some risks that are commonly excluded on this policy are:
Damage from animals that you own
Smog, rust or other corrosion
Wear and tear
HO-4: The tenants policy
This one’s not actually homeowners insurance in the sense that it’s not for those who own their homes, but rather for renters. It covers you if you lease an apartment or home. Your personal property would be covered under this policy both inside your place of residence and outside (essentially wherever you roam). HO-4 covers the same 16 perils listed in both HO-2 and HO-3 policies. Coverage for additional living expenses if you have to relocate, as well as liability, are also included.
HO-5: The deluxe policy
An HO-5 policy offers the best and most coverage of all the types of homeowners insurance available for single-family dwellings. It’s very similar to an HO-3 policy in that it has the same exclusions. However, there are a few important differences:
In an HO-5, your house and personal property are covered for full replacement costs (not cash value). In an HO-3, you would only get cash value unless you add replacement cost protection.
It provides “all-risks” coverage for both your home and your personal property; an HO-3 covers only “named” perils for belongings.
HO-5 policies have higher coverage limits for more expensive items like jewelry, fine art and electronics.
While an HO-5 policy costs considerably more than a HO-1 or HO-3 policy, the added level of security may be worth it, especially if you’re a homeowner who’s spent a lot of time on internal home improvements or lives in a disaster-prone area.