There are many types of homeowners insurance policies
There are several types of homeowners insurance policies. These are called “policy types”. You should note that these policies might be called differently by different insurance companies.
Most popular: Insurance with HO-3 designation
These insurance policies are also known as “special forms” and are the most commonly used. You are likely to need at least this level coverage if your mortgage lender requires it.
Insurance policies HO-3 generally cover damage to your house from any cause other than those exempted by the policy, such as floods or earthquakes. In the case of your belongings however, HO-3 coverage typically only covers damage caused by perils that are listed in your policy.
Broadest coverage: HO-5 insurance
A homeowners policy with HO-5 insurance provides the best coverage. It covers your home and personal belongings for any cause, except those excluded by the policy. This is typically only offered to homeowners who live in low-risk areas.
Limited coverage: HO-1, HO-2 Insurance
Less popular is HO-1 or HO-2 homeowners insurance. These policies only pay for damage caused due to events that are listed in the policy.
Other policy types include HO-4 Insurance for renters and condo owners, as well as HO-6 insurance for condominium owners.
How homeowners insurance works
Your homeowners insurance company will not simply send you a check for your policy’s amount if your house is damaged. First, you will need to file an insurance claim. Your coverage options and deductibles will impact the payout.
Actual cash value vs. replacement costs
The coverage you have will cover the cost of your home’s reconstruction, regardless of whether it exceeds your policy limits. This may happen if your coverage limits aren’t changing but construction costs have risen in your area. Here’s a list of possible options.
Actual cash value coverage pays for the repair or replacement of your property. There is no deduction for depreciation. While this isn’t a common method of calculating the actual cash value for your house, it’s a common one for personal items. You’ll likely receive a fraction the price of buying new items for items older than 10 years.
Functional replacement cost value coverage allows you to replace your home’s materials with cheaper, similar products. You could have your contractor replace plaster walls damaged by cheaper drywall.
Replacement cost value insurance pays for the repair of your home using materials of “like quality and kind.” Plaster walls can be replaced with plaster. However, the payout is not subject to your policy’s maximum dwelling coverage.
Some policies include replacement cost coverage for personal belongings. This means that the insurer would cover the cost of replacing your belongings with newer ones without depreciation. You should review the policy details if this option is important to your purchase. Although it’s a common option you will usually need to pay more.
Extended replacement cost coverage will pay more than your dwelling coverage up to a certain limit if you have the means to fix your house. You can set a limit as a dollar amount or percentage, like 25% above your current dwelling coverage. This provides a buffer in the event that rebuilding costs are higher than you anticipated.
Guaranteed replacement cost coverage covers your entire home’s cost after a covered loss. Some insurance companies do not offer this level coverage.
Homeowners insurance deductibles
The deductible in homeowner policies is usually the amount you have to pay before your insurer begins paying. The deductible may be:
- A flat dollar amount such as $500 or 1,000
- A percentage, such 1% or 22% of the home’s insured value.
Your insurer will deduct your deductible when you receive a claim-check. If you have $1,000 in deductible, your insurer will approve a claim for $10,000 repairs. You would have to pay $1,000, while the insurer would pay $9,000