5 Different Types of Homeowner’s Insurance
Owning a home can be a risky business. Homeowner’s insurance provides protection against risks such as medical payments for anyone who injures himself on your property, legal fees if the injury case goes to court and hazard insurance against the cost of damage from fire, theft, wind or a bursting water pipe. Mortgage lenders require borrowers to take out hazard insurance to guard against the loss of the house. Homeowners insurance comes in several standard forms.
Insurers use the term HO-1 to identify a bare-bones policy (discontinued in many states, according to the International Risk Management Institute). It provides hazard insurance covering a list of “named perils,” as well as liability insurance. Liability occurs when an owner is held responsible for an accident on his property, such as a visitor tripping over a loose step and breaking her ankle.
HO-2 covers the owner’s house, other buildings on the property, personal property–furniture, clothes, books and so on–as well as liability insurance. The list of “named perils” is broader than under HO-1. Some policies also pay expenses if the owner has to move into a hotel or apartment while his house is being repaired. The policy covers personal property up to a percentage of the value of the policy, typically 50 to 70 percent.
HO-3 is the policy most commonly used today, the institute states. It offers the same features as HO-2, but protects homes against any damage not specifically excluded; floods, earthquakes and water seepage are standard exemptions. Personal property is only covered for damage from the 16 named perils in the policy.
4. Cash Value
A cash value policy pays owners the original purchase price of whatever was damaged, less depreciation for wear and tear, the Federal Citizen Information Center states. If the owner bought her house for $80,000 10 years ago, the most she can claim is $80,000 less a decade of depreciation, even if the appraised value of the house is higher.
5. Replacement Value
A replacement value policy covers the cost of replacing or repairing a house or personal possessions, regardless of the cash value or the original purchase price. A $125,000 policy, for instance, will pay for repairs and replacements up to the policy’s value. A guaranteed or extended replacement value policy will cover expenses above the value of the policy.
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