How to Choose the Right Type of Homeowners Insurance in 3 Easy Steps
Owning a home comes with quite a bit of personal and financial risk, which is why home insurance is such a valuable resource.
But with so many different types of homeowners insurance on the market, it’s often difficult to narrow down your options.
Choosing the right policy can be exhausting, especially if you’re unsure about what home insurance is and what it covers.
The best way to make an informed decision is to review the fundamentals of home insurance, as too much or too little coverage can be costly.
To save you some time, let’s go over some of the basics.
- What is Homeowners Insurance?
- 3 Steps for Choosing the Right Policy
What is Homeowners Insurance?
Homeowners insurance offers a range of financial protections for accidents and disasters that may impact your home or personal belongings, from fire and storm damage to theft and vandalism.
Opting out of homeowners insurance leaves you solely responsible for any repair or replacement costs following a damaging event.
Nearly all home insurance plans are considered packaged policies, as they cover a variety of unique risk categories.
According to the Insurance Information Institute, standard homeowners insurance includes four types of coverage: dwelling, personal property, liability, and additional living expenses.
While every insurer features different policy tiers, coverage options, and costs, most supply comparable protections in these four basic areas:
- Dwellings: Standard homeowners policies help to pay off repair or rebuild costs if the physical structure of your home is damaged or destroyed by a covered event. Most policies also cover affixed structures like garages, decks, and porches. Homeowners typically purchase enough coverage to rebuild their home in its entirety, rather than a portion of its overall value.
- Personal property: If your personal belongings are destroyed or stolen, a basic home insurance policy will compensate you for their estimated value. However, it’s important to note that standard coverage will not reimburse you for the full amount of expensive items like jewelry, high-end electronics, and antiques. Basic homeowners policies have value limits for personal property compensation.
- Liability: This coverage type protects you and your family members from costly lawsuits for bodily injury or property damage to other people. The liability portion of your homeowners insurance policy will help you pay for any legal defense costs and court awards you may incur, but most insurers include limits in their contracts. Additionally, standard policies include no-fault medical coverage for any guests that are injured on your property.
- Additional living expenses: Homeowners who are forced to seek temporary living arrangement while their home is being repaired or rebuilt are often compensated for those expenses. This includes the cost of renting a hotel room, restaurant bills, and more, but most standard policies include time limitations in the fine print.
In addition to these basic types of homeowners insurance, providers also offer supplemental (or “add-on”) policies for specific hazards that are not covered by standard contracts and for those who want to extend policy limits for their expensive belongings.
For example, flood insurance is only supplied through the National Flood Insurance Program and is not included in any standard or enhanced policies.
Some other examples include:
- Earthquake insurance
- Sewer backup and sump pump insurance
- Inflation insurance
- Identity theft insurance
Now that you have a basic understanding of homeowners insurance, let’s dive a bit deeper into the details.
It’s important to know the difference between named and open perils, as this will prevent you from signing up for subpar coverage.
Home insurance policies that involve “named perils” will only protect your home and personal property from specific hazards that are listed in your contract.
Any damage or loss that results from an unnamed peril will not be covered, forcing you to pay out of pocket for repairs and replacements.
In contrast, “open peril” policies cover damages caused by any hazard unless it’s explicitly discluded in your contract.
This distinction is crucial for selecting the right homeowners insurance plan, so be sure to read your contract carefully before signing up.
Learn more about this important decision by reading our article Hazard Insurance vs Homeowners Insurance.
3 Steps for Choosing the Right Homeowners Insurance Policy
Learning about homeowners insurance is the best way to get the coverage you need at a price you can afford.
But before you start reaching out to insurers directly, there are a few things you should consider.
Here are four easy steps to selecting the best home insurance policy for your needs:
Step 1: Research specific policy types
Home insurance typically falls into one of the eight common policy terms that dominate the market, according to the National Association of Insurance Commissioners.
While insurers tend to use different language to define these terms, it’s useful to understand the distinct features of each category before you enroll.
- HO-1 – Basic form: The affordability of other types of home insurance has made this policy offering less common in recent years, though it is the cheapest available option. HO-1 policies cover just 10 named perils, including fire and smoke, explosions, lightning, hail and windstorms, theft, vandalism, damage from vehicles, damage from aircraft, riots and civil commotion, and volcanic eruptions. Homeowners who suffer loss from any other hazard must pay for repair and rebuild costs out of pocket.
- HO-2 – Broad form: This more comprehensive policy type includes all the named perils in HO-1 offerings along with several additions, such as falling objects, damage caused by the weight of ice and snow, frozen AC and heating systems, and more. That said, HO-2 policies only cover named perils, so it may not be the best choice for homeowners interested in an extensive insurance plan.
- HO-3 – Special form: Considered the most common type of homeowners insurance, HO-3 policies provide coverage for all named perils in HO-2 plans and a whole lot more. This policy form is sometimes a hybrid of named and open perils, though the particulars depend on the specific contract details. HO-3 plans extend dwelling, personal property, liability, loss of use, and guest medical coverage.
- HO-4 – Tenant’s form: This policy form is specifically designed for renters, as it only covers personal belongings and liability.
- HO-5 – Comprehensive form: Homeowners looking for maximum coverage should consider this open peril policy, as it protects against the widest range of common hazards. HO-5 offerings contain all the basic coverage options associated with standard homeowners insurance, from dwelling and other structures protections to personal property and liability safeguards. Although most policies of this type do have exclusions, there are plenty of opportunities to supplement your plan with extra options.
- H0-6 – Condo form: This type of insurance policy is tailored to the needs of condo owners and does not provide adequate protection for traditional homeowners.
- HO-7 – Mobile home form: Owners of mobile or manufactured homes may benefit from this policy form, as it features many of the coverage options as HO-3 offerings.
- HO-8 – Older home form: While this policy form is usually carried by historic homes and registered landmarks, it’s also a valuable resource for older properties. HO-8 offerings are markedly similar to HO-3 policies, but include special adaptations that address some of the specific risks that older homes contend with, like outdated plumbing and electrical systems.
Step 2: Review your coverage needs
The best home insurance policies conform to your unique coverage needs and the environmental risks your property will likely encounter.
For example, homeowners living in Kansas do not need to worry about adding supplemental hurricane insurance to their policies.
It’s important to do some research on the common hazards in your area to determine what types of coverage you may need.
Beyond environmental threats, there are several cost factors every homeowner should consider, including:
- Coverage limits: Standard homeowners insurance has policy limits that dictate how much reimbursement and financial support your entitled to in the event of a covered loss. This can leave you paying out of pocket if your home needs extensive repairs or if your personal property is exceedingly valuable. Homeowners should calculate the full replacement cost of their home and their expensive possessions before signing up for home insurance to ensure they receive adequate coverage.
- Deductibles: Selecting the right deductible is crucial for getting the most out of your homeowners insurance policy. A deductible is the amount you must pay toward damages or losses before your insurance kicks in, which can have a significant impact on any policy claim you file. For example, policyholders who choose a $1,000 deductible would only receive $9,000 from their insurer if they submitted a $10,000 claim.
- Premiums: Homeowners insurance is paid for through monthly premiums, which fluctuate based on your home’s value, your credit score and history, and your coverage options. The more coverage you elect, the higher your monthly premiums. Comprehensive HO-5 policies tend to have the highest premiums because they offer the most extensive coverage. Enrolling in supplemental policies that protect against specific hazards or extend your policy limits will drive up your monthly premium, so be sure to only sign up for what you need.
Step 3: Weigh your options
Insurance companies charge different rates for the same coverage, making comparative shopping strategies crucial for getting the exact policy you need at an affordable monthly premium.
According to NAIC, insurers use one of three methods to sell their products: independent agents, exclusive agents, and direct market.
Each of these methods comes with a variety of benefits and limitations.
For example, exclusive agents only offer products from a single insurance company, which may prevent you from landing a competitive rate.
Additionally, not all insurance companies provide the same level of customer service, claims processing, or policy support.
The best way to ensure you’re getting the best deal is to speak with a number of different insurance providers and compare the policy quotes they offer you.
Here are four tips that can help you weigh your options:
- Ensure policy quotes contain all the coverage you’re looking for
- Ask the insurance agent about available discount programs
- Research the reputation of insurance companies in your area
- Review your policy contract thoroughly before signing up
Home insurance can be costly, but opting out of coverage can result in significant financial loss over the long term.
To learn more about homeowners insurance policies, check out our top insurance company reviews.