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Types of Policies
Insurance companies determine premium pricing according to the number of perils covered by a policy. Perils can include fire, wind, theft, explosion and vandalism. An HO-1 policy offers basic coverage against 10 perils and pays for possessions and the home. The HO-2 policy offers broader coverage, against up to 16 perils. An HO-3 policy pays for all perils covered by an insurance company, with the exception of hazards excluded in the policy terms. HO-4 policies offer coverage for renters against 16 perils, paying for possessions only, with no coverage for the home structure. HO-6 coverage protects condominiums and co-op properties and can work in conjunction with owners' association policies. Homeowners with older houses can purchase an HO-8 policy, which covers 16 perils, but only pays repair costs, not replacement of a home.
The year a home was constructed, location, size and materials can influence the price of insurance. For example, a wood home can cost more to insure than a brick home because it poses a higher risk for fire damage. A home built on the beach cost more to insure because of water damage risks. A home with a fire hydrant on the property can cost less to insure than a home in a rural area
with no water source available for firefighting.
Insurance companies often offer discounts for homeowners who make safety improvements to a home, such as installing smoke detectors, deadbolt locks or burglar alarm systems. Homeowners over 55 years of age might receive a discount and people who have other policies with an insurance company, such as automobile coverage, can often receive a lower price. Upgrading electrical systems, plumbing or heating systems in older homes can often reduce hazard insurance premiums.
Hazard insurance policies have a deductible, the amount homeowners must pay out of their own pockets when perils strike. Choosing a higher deductible can reduce the cost of an insurance premium, but requires more money from the homeowner when filing a claim. For example, a hazard insurance policy with a $5,000 deductible can offer a lower premium than a policy with a $1,000 deductible.
Replacement Cost and Market Value
Insurance companies issue hazard insurance policies based on the replacement cost or market value of a home. A replacement cost policy pays for replacing a home when completely destroyed, while a market value policy pays a homeowner based on the market value of the home. Replacement cost policies typically pay a higher claim amount but have a higher premium than a market value policy.