Homeowners insurance: a comprehensive guide

Your home is probably the largest single financial investment you’ll ever make, but it’s also far more than that — it’s where you make your family memories. That’s why it’s a good idea to protect it by purchasing a homeowners insurance policy, so you can get your life back on track more quickly if something were to happen. Your lender may also require you to purchase homeowners insurance if you borrow against the equity in your home, such as with a mortgage or a Home Equity Investment (HEI). 

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Purchasing a policy is generally an easy process, but there are many types of homeowners insurance available. We’ll walk you through which ones you should consider, along with what other optional coverages may be good to consider. 

What is homeowners insurance?

Homeowners insurance is designed to protect your home and/or your belongings inside of it against certain dangers, called perils. If your home or your belongings are damaged due to one of these perils, and it’s covered by your policy, you can file for financial reimbursement. You’ll have to pay a deductible first (typically ranging from $500 to $2,000), but after that, you’ll be protected up to the coverage limit of your policy.

Most policies also offer personal liability coverage as well as additional living expense and loss of use coverage in case you’re temporarily displaced. Homeowners insurance unfortunately can’t prevent bad things from happening to you and your home in the first place, but at least it can help to make things right for you financially. 

Different types of home insurance policies

The insurance industry has standards for the specific perils that different types of homeowners insurance policies cover. These perils include:

1. Fire and lightning
2. Windstorms and hail
3. Explosions
4. Riots and civil disturbances
5. Damage from aircrafts
6. Damage from vehicles
7. Smoke
8. Vandalism
9. Theft
10. Volcanic eruption
11. Falling objects
12. Ice and snow damage
13. Sewer backups and other accidental water discharge damage
14. Accidental water damage from burst pipes
15. Frozen pipes
16. Electrical discharge

HO-1: Basic Form

This policy only protects you against the first 10 perils listed above, making it relatively affordable since it’s not as comprehensive as other types of homeowners insurance. According to the Insurance Information Institute, HO-1 insurance isn’t even available in most states. 

HO-2: Broad Form

Compared to an HO-1 policy, an HO-2 policy is — as the name implies — much more broad because it covers all 16 listed perils instead of just the first 10. You can save a bit of money by purchasing an HO-2 policy, however they’re not commonly offered by insurers, and you’re still not as fully protected as with other policies. 

HO-3: Special Form

The most common type of homeowners insurance people typically buy is an HO-3 policy, consisting of 78% of all owner-occupied homeowners insurance policies written in 2020. Unlike the first two forms, it’s an open peril policy, meaning it’ll cover any type of damage to your home except for things specifically excluded from the contract, such as:

• War
• Floods
• Sinkholes
• Mudslides
• Landslides
• Earthquakes
• Nuclear disasters

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The HO-3 policies, therefore, cover a much wider range of threats, such as rogue baseballs from neighborhood children. That makes HO-3 policies more expensive, but it also provides more protection. Your personal belongings, however, are still only covered against the first 16 perils listed above. 

HO-4: Contents Broad Form (for tenants and renters)

If you’ve rented a home or apartment in the past, you might be familiar with the HO-4 policy, which covers your belongings against all 16 perils but specifically excludes structural coverage. After all, you don’t own a home that you need to protect — that falls on your landlord. 

HO-5: Comprehensive Form

If you want more coverage than an HO-3 policy provides, choose an HO-5 policy. It also covers all perils except those specifically excluded by an HO-3 policy, but if you need to make a claim, it’ll cover the cost of rebuilding your home, which is typically much higher than the actual cash value payout that other policies offer. 

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That’s why it’s a rarer and more expensive policy, making up just 13% of owner-occupied policies in 2020. This type of policy is more popular among homeowners with higher-value homes because it provides more coverage. 

HO-6: Unit-Owners Form (for condos and co-ops)

Condo insurance is similar to the HO-4 renters’ insurance policy because it doesn’t offer dwelling coverage for your shared building, although it typically protects any upgrades and improvements you personally have done to your unit. You’ll be covered against all 16 named perils. 

HO-7: Mobile Home Form

If you live in a detached home that’s movable, such as a mobile home, RV, trailer, or a tiny home, an HO-7 policy is what you’ll use. This is an open-peril policy like the standard HO-3 homeowners insurance, but it’s important to note that you’re only covered if your home is in a stationary position. If you’ll be moving around, you may need another coverage option, such as a transit endorsement.   

HO-8: Modified Coverage Form (for older homes)

Your home will need to meet certain requirements for a regular HO-3 policy, and this can pose a challenge for older homes crafted with outdated building codes and materials. Instead, your older home may qualify for an HO-8 policy which provides coverage against the first 10 named perils, similar to a bare-bones HO-1 policy. 

Common exclusions and optional add-ons

Most homeowners insurance policies don’t provide protection against certain common threats, notably floods and earthquakes. If you live in a seismically active area such as California or Washington, it’s wise to consider earthquake insurance, even though it can be expensive. You can check your home’s flood risk and purchase flood insurance on FEMA’s website. 

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You may also want to purchase additional coverage if your insurer’s policy doesn’t offer sufficient protection for all your personal belongings. Many policies only cover up to $1,500 in jewelry, for example. Finally, make sure you’re staying current with your home’s upkeep because problems stemming from deferred maintenance are commonly excluded from homeowners insurance policies.

Frequently asked questions

Do I need homeowners insurance? 

If you borrow against the equity in your home through a mortgage, an HEI, or another home equity financing option, then yes — you typically will need to purchase a homeowners insurance policy. Otherwise, it’s generally considered optional, but most financial experts highly recommend it. 

How much homeowners insurance do I need?

There are many ways to figure out how much homeowners insurance you need, but a good insurance broker or financial advisor can provide the best and most personalized assistance. You’ll need to calculate the value of your home and property, assess your potential risks, and weigh the cost of your coverage options. 

What is the difference between named peril and open peril homeowners insurance?

A named-peril homeowners insurance policy only protects you against 10 to 16 specific threats, such as fire or theft. An open-peril homeowners insurance policy provides much broader protection since it covers all threats except for a few specific exclusions, such as earthquakes and floods. 

Final thoughts

It’s a good idea to create a home inventory with a record of everything you own by listing it out or just taking a series of photos and videos as you walk around your home. Hopefully you never need it, but your home inventory will offer you additional peace of mind in case you ever need to provide evidence to back up a claim. That way you can fully enjoy the benefits of your home for years to come, regardless of what obstacles get thrown your way in the future.