As you shop for homeowners insurance, it’s important to recognize that not all policies are the same. While the price you see in a home insurance quote is important, you should also account for the type of coverage the proposed policy provides for your home and belongings. Here are the most important things to know about the different types of homeowners insurance.
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What are the different types of homeowners insurance?
There are eight types of homeowners insurance, and the differences between them are based largely on the homes they cover and/or the levels of coverage they provide.
For example, an HO-3 provides a higher level of coverage for a single-family home than an HO-2, while HO-6s are designed for unit-owners in a condominium or co-op.
The most important levels of protection to consider in home insurance are named- vs. open-peril and actual cash value vs. replacement cost.
Named-peril vs. open-peril insurance
Named-peril insurance for your home and belongings covers damage from causes listed in your policy. Open-peril, or all-risks, insurance protects against any cause not specifically excluded. Of the two, open-peril coverage generally provides more protection and costs more.
However, neither open- nor named-peril homeowners insurance covers floods or earthquakes and other earth movements, which require separate insurance.
It’s also important to know that basic named-peril coverage only protects your home and belongings from 10 possible causes, while broad named-peril coverage protects against 16 risks.
Actual cash value vs. replacement cost coverage
Actual cash value insurance covers items at their depreciated value. Replacement cost insurance covers the cost of replacing them with new items of the same kind and quality. Replacement cost policies cost more, because they pay out higher amounts for claims.
Here’s a look at the levels of coverage provided by the different types of homeowners insurance you can get.
| Policy type | Coverage for your home | Coverage for your belongings |
|---|---|---|
| HO-1: Basic coverage for single-family homes | Basic named peril, replacement cost | Basic named peril, actual cash value |
| HO-2: Broader than basic coverage for single-family homes | Broad named peril, replacement cost | Broad named peril, actual cash value |
| HO-3: Standard coverage for single-family homes | Open peril, replacement cost | Broad named peril, actual cash value |
| HO-4: Contents coverage for renters | None | Broad named peril, actual cash value |
| HO-5: Comprehensive coverage for single-family homes | Open peril, replacement cost | Open peril, replacement cost |
| HO-6: Designed for condo and co-op unit owners | Broad named peril, replacement cost | Broad named peril, actual cash value |
| HO-7: Coverage for mobile homes | Broad named or open peril, replacement cost | Broad named peril, actual cash value |
| HO-8: Coverage for older single-family homes | Broad named peril, actual cash value | Broad named peril, actual cash value |
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How to choose homeowners insurance
Choosing the type of homeowners insurance to get depends largely on your financial situation and comfort level with risk.
In general, open-peril homeowners insurance with replacement cost coverage provides the most protection for any type of home. However, insurance policies with these coverages also cost the most.
If you have a mortgage, your lender is likely to require you to insure your home at its replacement cost value, or close to it. However, it’s still up to you to decide between named- and open-peril coverage for your home and the levels of coverage you want for your belongings.
Just bear in mind that insurance companies typically use terms such as standard, preferred, premium and deluxe to describe their insurance products, rather than technical HO numbers.
If a quote for some company’s “executive” package includes open-perils coverage for your home and named-peril coverage for your personal items, it’s basically an HO-3.
If your homeowners insurance quote does not clearly specify its proposed levels of coverage, ask for clarification.
HO-5s vs. HO-3s and other insurance for single-family homes
The biggest advantage an HO-5 has over an HO-3 and other single-family home insurance policies is the open-peril protection it provides for your belongings, or personal property.
HO-3s and HO-5s both cover your home on an open-perils basis. With an HO-5, your belongings get the same level of protection as your home. This can be especially useful if the combined value of your possessions is high.
HO-2s are generally cheaper than HO-3s and HO-5s. However, the coverage you lose by downgrading to the named-peril coverage an HO-2 provides for your home is rarely worth the savings.
HO-1s, which only provide bare-bones coverage, are not widely available anymore.
How do HO-4 and HO-6 insurance policies work?
The biggest difference between HO-4 and HO-6 policies, compared to other types of homeowners insurance, is the coverage they provide for the structure of your home.
An HO-4, or renters insurance, is generally the cheapest form of homeowners insurance, because it does not have to pay for structural damage to your home, which, instead, is covered by your landlord’s insurance.
HO-6s tend to be slightly more expensive than HO-4s. These condo or co-op unit owners policies typically cover structural damage within the walls of your unit at replacement value. They do not have to cover damage to your building’s exterior or common spaces, though, because these areas are covered by your condo or co-op board’s master insurance policy.
Standard HO-4s and HO-6s cover your belongings on a named-peril basis at actual cash value. However, many insurance companies offer optional upgrades to open-peril and/or replacement cost coverage for both policy types.
How is an HO-7 different from other home insurance?
Although HO-7 policies have many similarities to homeowners insurance for single family homes, HO-7s are designed to insure mobile homes.
An HO-7 often covers both your mobile home and your belongings on a named-peril basis. However, some companies offer open-peril coverage for your home, and some extend open-peril coverage to your belongings, too.
When should I consider HO-8 homeowners insurance?
If your home’s replacement cost value is greater than its market value, you may have to settle for HO-8 homeowners insurance.
Older custom homes and/or older homes built with obsolete building materials are the primary candidates for HO-8s.
HO-8s tend to cover your home at actual cash value. Since lenders typically require homes to be insured on a replacement cost basis, it may be difficult to get a mortgage for a home that only qualifies for HO-8 insurance.
Types of homeowners insurance: frequently asked questions
The primary difference between homeowners insurance and renters insurance is that renters insurance does not cover structural damage to your building, which is usually covered by your landlord’s insurance. This is the main reason why renters insurance is so cheap.
All homeowners insurance policies cover a fire that damages or destroys your home, unless you intentionally set the fire.
An HO-3 is widely considered to be the homeowners insurance standard for single-family homes. HO-3s cover homes at their replacement value on an open-peril basis and personal property at actual cash value on a named-peril basis.
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