Homeowners insurance can be confusing—What do I need? What am I covered for?—but it is necessary.

Before you settle on a policy, there are a few things you need to understand.

Let’s Break Homeowners Insurance Down

You don’t have to get insurance on your home, but you should. In fact, most likely a mortgage lender will require you to insure your home. Besides, if something happens to what is likely the largest investment you’ll make in your lifetime, you don’t want to lose it.

There are several different policies, all covering different things to fit every homeowner’s needs. Generally, they fall under one of two categories: open-peril and named-peril.

Open-peril policies cover everything unless it is specifically listed as not covered in the policy, while named-peril policies cover only what is on a specific list.

HO1 (basic named-peril)

This is the most basic home insurance coverage you can get. It covers 10 specific perils, including:

HO2 (broad named-peril)

This covers the same things that are included in the HO1 polic, as well as some additional perils. Here's what's covered:

HO3 (hybrid open-/named-peril)

The HO3 policy is a mix, with your house being covered per an open-peril policy format while your personal belongings are covered per a named-peril policy format.

HO5 (full open-perils)

This policy covers both your home and personal property, unless it is specifically excluded in your insurer’s policy. Such exclusions often include flood or water damage.

The following are often not included in these coverage plans:

You’ll need specific flood or earthquake insurance if you live in an area that is prone to these national disasters. Also, you can add endorsements to your policy, likely at an extra cost, to add protection for anything your policy doesn’t include.

Other Insurance Options

If you have an older home, you’ll likely want to consider an HO8 (market value) policy. The HO8 covers at the current market value of your home rather than the actual cost of repairs.

With this policy, you have home protection for the same things that are covered under an HO3 policy while your contents are covered as they would be in an HO1 policy.

Other policies include HO4, which is a renter’s policy, HO6, a condo policy. These come in handy if you are renting an apartment or condo, as they both only cover things inside the home, such as walls, floors, etc. The exterior of your rental or condo should be covered by the owner/manager’s insurance policy.

Pay with Your Escrow Account

You can also pay your homeowners insurance through an escrow account. What does that mean?

Well, an escrow account holds money in savings, and one for your mortgage holds money you’re saving specifically to pay off your home.

Usually, a home purchase involves two escrow accounts: one for the first transaction, along with any important documentation, and another which will hold money for future deposits. This second one is through your mortgage lender, while the first is often overseen by an escrow officer.

What’s great about this? You don’t have to worry about paying the bills! Well, of course you have to pay the bills, but with an escrow account all you have to do is deposit the money. Then, the lender sends out your monthly payments in smaller increments. If you put in more than you needed to by the end of the year, you can get the money back.

Sources:

https://www.nerdwallet.com/blog/insurance/understanding-homeowners-insurance/
http://www.insurance-education-group.com/
http://www.homeinsurance.org/home-insurance-guide
https://www.esurance.com/info/homeowners/paying-homeowners-insurance-through-escrow