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Explain the Basics of Homeowners Insurance and Know How to Reduce Costs

Your home is likely one of the largest single purchases you will ever make. Because your home is such an important purchase, it needs to be protected. Homeowners insurance is one way of protecting your home. The purpose of homeowners insurance is to cover the costs of repairing or replacing your home in the event that it is damaged by specific disasters such as fire, theft, storms, faulty household systems or appliances, riots, volcanoes, vehicles, or aircraft. Know which risks you want homeowners insurance to cover, and make sure that you get the type of homeowners insurance that covers those risks.

Basic Types of Homeowners Insurance

There are six basic types of homeowners insurance. Each type is briefly explained below:

  1. HO-2 is a general form of homeowners insurance; it covers only named perils. These perils may be fire, lightning, hail, explosions, and so on. If a peril is not listed, it is not covered by the insurance. HO-2 is the least expensive type of homeowners insurance.
  2. HO-3 is a unique type of homeowners insurance that includes open perils protection. Open perils protection covers all direct physical losses to your home and lists specific exclusions. All forms of homeowners insurance exclude certain types of damage, including damage caused by law (problems caused by a lack of proper permits), earth movement (earthquakes), water damage (floods), power failure, neglect, war, nuclear accidents, and intentional loss. Although HO-3 excludes these perils as a general rule, coverage for some of these specific perils may be added separately to the policy. HO-3 coverage is generally recommended as a minimum level of homeowners insurance.
  3. HO-4 is renters and tenants insurance. Because this coverage is available only to renters and tenants, it covers damage or loss of personal property rather than loss or damage of the structure itself. HO-4 provides liability coverage in case of an accident, but it does not cover structural damage. The personal property coverage provided by HO-4 is similar to the coverage provided by HO-2. All-risk coverage is available for HO-4 insurance and is recommended. All-risk coverage includes coverage for all risks except those excluded from homeowner’s coverage including damage caused by law, earth movement, water damage, power failure, neglect, war, nuclear accidents, and intentional loss.
  4. HO-5 is a new, unique form of homeowners insurance that covers open perils and includes a rider (HO-15) that allows open perils coverage on personal property in addition to other coverage. HO-5 covers all direct physical losses to your home, or open perils protection. HO-5 has the same exceptions as HO-3.
  5. HO-6 is condominium owners insurance. HO-6 is similar to HO-4 coverage, but it is available only to co-op or condominium owners. Besides covering personal property, this insurance also covers improvements you have made to the dwelling. All-risk coverage is available as an option and is recommended.
  6. HO-8 is modified coverage for older homes. HO-8 is similar to HO-1 coverage, or insurance against named perils. It insures the dwelling for the repair cost or market value instead of the replacement value. All-risk coverage is available as an option and is recommended.


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