If you’re looking into buying a home, you’re probably aware that you’re also going to need to buy homeowner’s insurance. Navigating policies along can be confusing and overwhelming, which is why we took the time to break down and explain your coverage options. Keep reading to learn how to decode your policy.
There’s different types of coverage
Every insurance policy is different, so you’ll want to read yours carefully to make sure you understand what’s covered. However, there are a few distinct types of policies that you can buy. They are:
HO-1 Basic Form
The simplest form of home insurance, this form is not seen much anymore. Most mortgage companies argue that it doesn’t offer enough coverage since only covers specific events, such as:
- Fire or smoke
- Explosions
- Lightning
- Hail and windstorms
- Theft
- Vandalism
- Damage from vehicles
- Damage from aircraft
- Riots and civil commotion
- Volcanic eruption
HO-2 Broad Form
A broader form of HO-1, this form of insurance is still specified. It covers the above events, plus the following:
- Falling objects
- Damage from the weight of ice, snow, or sleet
- Freezing of household systems like AC or heating
- Sudden and accidental tearing apart, cracking, burning, or bulging of pipes and other household systems
- Accidental discharge or overflow of water or steam
- Sudden and accidental damage from artificially generated electrical current
- Your personal belongings
HO-3 Special Form
These days, this is the most common form of home insurance. Instead of solely covering specific incidents, these policies cover any damage to your home’s structure and your belongings, except for certain events that are excluded under the terms of the policy.
HO-5 Comprehensive Form
As the name suggests, this is the most comprehensive form of home insurance that you can buy. Like HO-3 policies, it covers against any sudden or unexpected events, except those excluded. However, this form has fewer exceptions and you can usually also decide your own coverage limits.
Note: There are other forms of home insurance not mentioned above. They are for specific types of housing such as condos, rentals, or mobile homes.
Not everything is covered
One of the most important things to understand about your policy are the exclusions, or the things that are not covered. Typically, things like floods, earthquakes, landslides, and construction needed to bring your home up to code are not included in a standard HO-3 policy. Be sure to read over any policies while you’re shopping for home insurance, You’ll want to understand exactly what your exclusions will be.
Depending on where you live, you may need more coverage than is offered in the standard policy. In this case, you may need to get rider insurance. A rider is a provision that adds or amends coverage to your policy. While riders come at an additional cost, it’s usually worth getting coverage. In this case, it’s better to be safe than sorry.
How reimbursement works
If you do need to make a claim and it is covered under your policy, the insurance company will issue you a payment for any damage to your home or lost belongings. They’ll reimburse you in one of three ways:
Cash value coverage
This type of reimbursement typically comes with more affordable policies, but it also comes with the smallest payout. In this, the insurance company will issue a payment for the cost of replacement, minus a deduction for appreciation.
Replacement cost coverage
These policies will replace your items without deducting for appreciation. However, you’ll only receive coverage up to the policy limits. If your costs go beyond that, you could still end up paying out of pocket.
Guaranteed or extended coverage
Again, this is the most comprehensive and expensive type of payout. With these types of policies, the insurance company will pay for the cost of replacement, even if it goes beyond your coverage limits.