One of these days, I’ll end up buying a home. It will probably be years from now as I finish paying off student loans and decrease my shopping habits, but it will happen. Once it does, I will need to get a homeowner’s insurance policy that offers the best coverage for me. There are two main policies within homeowner’s insurance, HO-3 and HO-5. The HO-3 policy is a combination of an open peril and a named peril policy, while an HO-5 policy is an open peril policy. What are open and named perils you may ask?
- Open Peril
- An open peril is a policy that includes coverages on things such as floods, earthquakes, and mold. Put simply, everything besides the stated exclusions to your policy are covered under an open peril. This includes both your physical structure of your home and your personal belongings.
- Named Peril
- A named peril policy only covers damages from a specific event that are directly listed in your policy. Some of these events are typically fire, wind, theft, or frozen pipes.
An HO-3 policy is the most standard homeowner’s insurance policy. It covers four different components: dwelling and other structures, personal property, liability, and additional living expenses. The physical structure of your home is covered on an open-peril basis while your personal property is covered on a named-peril basis.
An HO-5 policy is less complex than an HO-3 policy. It is strictly an open peril policy. With an HO-5 policy, dwelling coverage, personal property, liability, and additional living expenses are still covered, however, your dwelling and personal property are covered under an open peril policy instead of a named peril policy.
Which policy is right for me?
While HO-5 has better coverage, it also comes with a higher premium. For most high-net-worth individuals, an HO-5 policy is the way to go. With expensive personal belongings, having an HO-5 policy which covers them under an open peril policy makes it easier for you to make sure they are taken care of in case of an incident. Comparing the actual cash value of your belongings versus the replacement cost is also a great way to figure out whether you need an HO-3 or an HO-5 policy. If there is a significant gap between the two, HO-5 is the policy for you.
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