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HO-3 vs HO-5 insurance: What’s the difference

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Your home is likely one of the largest financial investments you’ll make in your life. Having the right type of insurance coverage can make a big difference when an emergency occurs at home — whether to the physical structure, your belongings or someone injured on-site. HO-3 and HO-5 policies are the two primary types of homeowners insurance available to protect your home, so it’s helpful to know which one is right for you to get the coverage you truly need.

HO-3 insurance

An HO-3 insurance policy is the standard type of homeowners insurance chosen by most homeowners. It includes four components of coverage: dwelling and other structures, personal property, liability and additional living expenses. 

Events covered in this policy depend on the type of claim filed. With this type of policy, the structure of your home is covered on an open-peril basis. That means that any damaging type of event is covered except for those specifically listed as exclusions. Your personal property, on the other hand, is covered on a named-peril basis. You can only file a claim if the damage or loss that occurs is included in a list of specific (named) events.

HO-5 insurance

The difference between HO-5 and HO-3 policies is that the former is more comprehensive than the latter. You still get coverage for dwelling, personal property, liability and additional living expenses, but both your dwelling (including other structures) and your personal property are covered on an open perils basis with HO-5 insurance. This offers more flexibility in what you actually get reimbursed for when it comes time to file a claim. You also may find higher coverage limits, especially if your home has a high market value or your belongings exceed the typical limits for reimbursement.

Difference between HO-3 and HO-5

The open peril coverage is the same for your dwelling coverage when you compare HO-3 and HO-5 policies; the primary difference is in how your personal property is covered. An HO-3 policy is more restrictive because you can only file a claim if your belongings are damaged or lost as a result of one of 16 named perils. HO-5 coverage is open peril, so you’re similarly covered when an event damages both your home and the contents inside — as long as it’s not a listed exclusion to the policy coverage. 

Another key difference is the amount of coverage you receive with an HO-5 vs. an HO-3 policy. Personal property coverage usually comes with dollar limits for specific categories, like jewelry, electronics or business property. The maximum amount allowed for reimbursement is typically much less with an HO-3 policy, although you can purchase an additional rider to allow for extra coverage. But with an HO-5 policy, those higher limits are already built-in. 

HO-3 policies also usually only reimburse your belongings according to actual cash value. So if your laptop is three years old at the time it’s stolen, you’ll only be reimbursed the amount it’s worth today. With an HO-5 policy, the insurer typically uses replacement cost value to determine payout amounts. In the same scenario, you’d receive enough to buy a new laptop with similar specs. The difference between these two types of reimbursement methods can be significant, especially if a major event occurs and a lot of damage occurs at the same time. If you plan to be in your home for more than a year or so, a replacement cost policy is almost always the smarter choice to protect your investment.

Open peril vs named peril

Exclusions in open peril policies usually include things like flood, earthquakes and mold. Everything beyond the list of exclusions is covered when you have an open peril policy, for either your structure or your possessions (or both, in the case of an HO-5 policy).

With a named peril policy, you may only file a claim if damage occurs because of a listed peril. This typically includes things like a fire, windstorm, theft or frozen pipes.

This HO-3 vs. HO-5 comparison chart breaks down open and named perils based on coverage type.

Open perilNamed peril
HO-3 dwelling coverageHO-3 contents coverage
HO-5 dwelling coverage
HO-5 contents coverage

Which should I choose?

Because HO-5 comes with better coverage, it also comes at a higher price. The value to you is based on whether the additional cost is worth the extra benefits. For instance, if you have a lot of high value belongings that exceed the normal limits of an HO-3 policy, then you might opt for an HO-5. 

Create a quick inventory of your belongings and compare the actual cash value versus approximate replacement cost. If the difference is significant, you may want to consider the HO-5 policy, even if it is more expensive. 

However, it’s important to note that the application process is a bit more rigorous for the HO-5 policy. A history of making insurance claims could result in denial. Insurance companies also consider your credit score in most states. You’ll need better-than-average credit in order to qualify for the HO-5 policy. If you don’t meet the insurance company’s standards, you can still apply for the standard HO-3 policy and have quality coverage for your home, but you may want to add additional coverages if you have gaps.

The takeaway

  • HO-5 offers more comprehensive coverage for your personal property
  • Both HO-3 and HO-5 have open peril coverage for your dwelling, but HO-3 coverage protects your belongings from named perils only.
  • An HO-5 policy is more expensive and requires stricter application requirements

Conclusion

Choosing the right type of homeowners insurance doesn’t have to be complicated. As with any financial decision, compare the cost to coverage you receive and decide if it’s worth it to have higher coverage. An insurance company can help you navigate the pros and cons to determine the benefits of an HO-3 vs. HO-5 policy for your needs.

If you’re extremely budget-conscious as a new or existing homeowner, then the less expensive policy may be the way to go. But if you’re worried about the cost of having to replace your belongings in the event of a large loss, HO-5 can offer a lot of peace of mind.

Lauren Ward

Lauren Ward is a writer for Coverage.com. She specializes in all things personal finance, including insurance, loans, and real estate.

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