Important Homeowners’ Insurance Policies You Should Know

Typically, having home insurance is necessary for all homeowners and not a luxury as many people view it. Home insurance helps you protect your possessions and house against theft and damage. It is also important to note that most mortgage companies don’t finance real estate transactions if you don’t have proof of home insurance. According to the Insurance Information Institute, approximately 93% of homeowners in the U.S. carry some form of homeowners’ insurance. Here are some essential home insurance policies to know before buying a house.

1. HO-1

HO-1 homeowners’ insurance is the basic form of insurance available. This type of insurance policy covers your home at its actual value. It can also protect your personal belongings though not in all cases. According to NerdWallet’s homeowners’ insurance guide, HO-1 is classified as a named-peril policy, meaning it only pays out for damage caused by events explicitly listed in the policy. The policy offers coverage for loss or damages caused by the following perils:

• Windstorm or hail
• Civil commotion or riot
• Vehicles
• Volcanic eruptions
• Mischief and vandalism
• Fire or lightning
• Explosion
• Aircraft
• Theft
• Smoke

This policy does not cover any loss or damage caused by not listed aspects. Due to its limited coverage, this policy is not recommended for most homeowners. In addition, most insurance providers no longer provide this policy. The National Association of Insurance Commissioners (NAIC) confirms that HO-1 has been largely phased out of the standard market due to its narrow scope of protection.

2. HO-2

HO-2 is one of the most widely used homeowners’ policies. It is affordable and straightforward.

This insurance covers your home and its personal belongings. The coverage offers protection against all the items listed in the HO-1 policy plus other perils like vandalism, malicious mischief, glass breakage, and riot/civil commotion. It is best for those looking for added protection but not necessary. This is because it covers many of the perils not covered in the HO-1 policy. As Bankrate notes, HO-2 remains a named-peril policy — meaning only specifically listed events trigger coverage — but its broader list of covered perils makes it a meaningful step up from HO-1 for budget-conscious homeowners.

3. HO-3

HO-3 homeowners’ insurance is more comprehensive than the previous policies mentioned above since it covers both your home and personal belongings against almost any type of damage or loss without a deductible provision. The coverage offered by HO-3 is slightly more expensive than HO-2. According to the Insurance Information Institute, HO-3 is the most widely sold homeowners’ policy in the United States because it provides open-peril coverage on the dwelling structure while covering personal property on a named-peril basis.

This is because a deductible provision in this policy kicks in when you have incurred damages or losses. It helps to compare the cost of policies if you think of increasing your coverage. Consumers comparing HO-3 options across providers like State Farm, Allstate, and USAA should pay particular attention to the replacement cost vs. actual cash value settlement option embedded in each quote, as this choice significantly affects any future claim payout.

4. HO-4

The HO-4 insurance policy — commonly known as renters’ insurance — covers the building or structure of the home and its contents like furniture and appliances. The policy also covers personal effects lost from within your home, such as jewelry, artwork, garden tools, etc. It also protects against earthquakes, windstorms, and hail damage. In addition, it also covers any damage caused to your home by theft, vandalism, fire, and other perils. According to Policygenius, the average HO-4 renters’ insurance policy costs approximately $148 per year, making it one of the most affordable forms of residential coverage available.

Another benefit of HO-4 is that there is no deductible provision. This effective coverage will be available in case of loss or damage through theft, vandalism, fire, and other perils. The Consumer Financial Protection Bureau (CFPB) encourages all renters to consider HO-4 coverage as a critical component of their overall personal financial safety net.

5. HO-5

This policy is also referred to as a particular or tailored building policy. It caters to home buyers who need a higher level of protection than the other policy types mentioned above. The main benefit of the HO-5 policy is that it offers you coverage for loss, damage, or destruction to your home caused by any perils listed in its coverage list. That means you can enjoy better security and protection than standard homeowners’ insurance policies. As Bankrate’s insurance analysts explain, HO-5 is the only standard form that provides open-peril coverage on both the dwelling and personal property simultaneously, which is what sets it apart from the HO-3.

If you are looking for more protection than what HO-2, HO-3, and HO-4 policies can offer, this policy is right for you. It protects against almost all the perils that may damage your home or its contents, like windstorms, hail, or volcanic eruptions. You are also covered in case of fire, lightning, vandalism, or malicious mischief, plus other unknown risks. So, if you want to have sufficient insurance coverage even after a natural disaster, then this policy is the best for you. Major carriers including Chubb and Travelers are among the most well-known providers offering HO-5 forms, according to NerdWallet’s policy comparison data.

Homeowners’ Insurance Policy Comparison Table

Homeowners Policy Terms to Know

• Replacement cost: The value of your house as it was initially purchased, including the exempt items. This is the amount you will pay for all future replacement costs, including replacing anything that is stolen or damaged.
• Replacement cost plus: This is similar to replacement cost but also covers the additional costs and expenses that come with replacing something that has been lost or damaged.
• Actual cash value: The current market value of your house is determined by an insurance company that specializes in insuring such things. This is the amount you will get if you file a claim on your home, and this amount may be less than the replacement cost due to improvements made to your house since your purchase (upgrading appliances, for example). The Insurance Information Institute notes that choosing actual cash value settlement over replacement cost can leave homeowners significantly undercompensated after a major loss.
• Named peril: Insurance policies are full of jargon, and one of the most common types is called peril. Named peril refers to the list of things or perils that your policy covers. For instance, a homeowner’s policy may have a named peril called “fire,” and if you file a claim due to fire damage, your insurance company will honor it.
• Exclusions: There are several items that your home insurance does not cover, such as floods and earthquakes. These are called exclusions, and you may be able to purchase additional coverage for these risks from certain insurance companies. Flood coverage, for example, is available separately through the FEMA National Flood Insurance Program (NFIP).
• Deductible: Your deductible is the amount you pay if anything happens to your property before any money from your insurance company is received. According to Consumer Reports, most standard homeowners’ policies carry a deductible between $500 and $2,500, and selecting a higher deductible is one of the most effective ways to reduce your annual premium.

Frequently Asked Questions

What is the most common homeowners’ insurance policy?

The HO-3 is the most common homeowners’ insurance policy in the United States. It provides open-peril coverage for the dwelling structure and named-peril coverage for personal property, striking a balance between broad protection and manageable cost for most homeowners.

What does homeowners’ insurance not cover?

Standard homeowners’ insurance policies typically do not cover flood damage, earthquake damage, routine maintenance issues, or sewer backups. Separate policies or endorsements — such as those offered through the FEMA National Flood Insurance Program (NFIP) — are required to cover these risks.

What is the difference between HO-3 and HO-5?

The key difference is how personal property is covered. HO-3 covers personal property on a named-peril basis, meaning only specifically listed events trigger a payout. HO-5 covers both the dwelling and personal property on an open-peril basis, meaning all causes of loss are covered unless explicitly excluded — making it the broader and more protective policy.

Is HO-4 only for renters?

Yes, HO-4 — also known as renters’ insurance — is designed specifically for people who rent rather than own their homes. It covers the tenant’s personal belongings and liability but does not cover the physical structure of the building, since that is the landlord’s responsibility.

What does actual cash value mean in a homeowners’ insurance policy?

Actual cash value (ACV) refers to the replacement cost of your property minus depreciation. This means that if your five-year-old television is destroyed in a fire, an ACV policy pays what that television is worth today — not what it would cost to buy a new one. Replacement cost coverage, by contrast, pays the full current cost of a comparable new item.

How much homeowners’ insurance do I need?

As a general rule, your dwelling coverage limit should be equal to your home’s full replacement cost — not its market value. Most insurance professionals recommend getting a professional replacement cost estimate from your insurer. The NAIC advises homeowners to review their coverage limits annually, especially after renovations or major purchases, to avoid being underinsured.

Does homeowners’ insurance cover theft outside the home?

Yes, most standard homeowners’ insurance policies — including HO-3 and HO-5 — provide off-premises theft coverage, meaning your personal belongings are protected even if they are stolen from your car, a hotel room, or another location away from home. Coverage limits and sub-limits may apply, so reviewing your policy’s personal property section is recommended.

What is a deductible in homeowners’ insurance?

A deductible is the amount you pay out of pocket before your insurance company begins covering a claim. For example, if you have a $1,000 deductible and experience $8,000 in storm damage, you pay the first $1,000 and your insurer covers the remaining $7,000. Choosing a higher deductible generally lowers your annual premium.

Does my credit score affect my homeowners’ insurance premium?

In most U.S. states, insurers use a credit-based insurance score — related to but distinct from your standard FICO Score — to help determine your premium. Homeowners with higher credit scores typically receive lower premiums. The practice is regulated on a state-by-state basis; California, Maryland, and Massachusetts are among the states that restrict or prohibit its use.

What is an insurance exclusion?

An exclusion is a specific condition, peril, or property type that your insurance policy does not cover. Common exclusions in standard homeowners’ policies include flooding, earthquakes, mold, ordinance or law coverage, and intentional damage. You can often purchase separate riders or endorsements to fill in exclusion gaps in your base policy.

Conclusion

You want to make sure that you are getting coverage that will be adequate for your needs and preference. Remember, no home insurance policy is absolute proof of protection, and it can be voided by the insurance provider in case you fail to sufficiently prove your claim. However, the need for such a policy is debatable as most homeowners do not have any coverage for theft or vandalism of their property.

If you are still not convinced about buying a home insurance policy, think about how much you consider a home as worth? For most people who rely on their homes as their main income generator, buying a home insurance policy is almost mandatory. As of April 27, 2026, the average American home is worth approximately $420,000 according to Zillow Research — an asset of that magnitude warrants careful, well-informed insurance protection.