What’s the Difference Between HO-3 and HO-5 Homeowners Insurance?

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HO-3 and HO-5 are both standard homeowners insurance policies, but they differ in how they cover personal property. An HO-3 policy offers more limited coverage and pays the current, depreciated value of your personal property; an HO-3 policy covers more risks and pays to replace your items with new ones of comparable quality. Here's a closer look at the coverage that HO-3 and HO-5 policies offer and how to decide which is right for you.

HO-3 vs. HO-5
HO-3HO-5
Dwelling coverageOpen perilsOpen perils
Other structures coverageOpen perilsOpen perils
Personal property coverageNamed perils; actual cash value (ACV) coverage is standardOpen perils; replacement cash value (RCV) coverage is standard
Loss of use coverageOpen perilsOpen perils
Average cost*$1,569 annually$1,659 annually

*Source: National Association of Insurance Commissioners (NAIC)

What Is the Difference Between HO-3 and HO-5?

The difference between HO-3 and HO-5 policies is the level of coverage they offer for your personal belongings, such as furniture, appliances and clothing, if you file a claim. Otherwise, HO-5 and HO-3 coverage is the same.

Both types of policies cover your home's structure and other structures on your property against all perils not specifically excluded in the policy. Both include loss of use coverage, which helps pay the extra cost of living elsewhere during covered home repairs. And both include liability coverage, which helps pay medical expenses if a visitor is injured on your property, as well as cover your legal costs if they sue you.

Open Peril vs. Named Peril

Open perils coverage provides coverage for all perils except those specifically excluded in the policy. (A peril is a cause of damage, such as fire, windstorm or burglary.) HO-5 policies provide open perils coverage for personal belongings. This means your possessions are covered against any peril that isn't listed as excluded in the policy.

Named perils coverage covers only those perils specifically named in the policy. An HO-3 policy provides named perils coverage for personal property. Perils not specifically listed in the policy aren't covered.

Actual Cash Value vs. Replacement Cash Value

Actual cash value (ACV) is the current, depreciated value of an item; replacement cash value (RCV) is how much it would cost to replace the item with a comparable new one.

If your belongings are damaged or destroyed by a covered peril, the standard HO-3 policy pays you their ACV. For instance, if a couch you bought five years ago for $2,000 is destroyed, an HO-3 policy might pay out $800. That may not be enough to buy a similar new couch.

Tip: You can usually upgrade an HO-3 policy to include RCV coverage for personal property at an extra cost.

An HO-5 policy pays the RCV of your possessions, which can make it easier to replace what's been damaged or destroyed. If a couch you bought five years ago for $2,000 is destroyed and a comparable couch now costs $3,000, for example, HO-5 coverage would pay you $3,000 for a replacement.

Both HO-3 and HO-5 policies typically limit coverage for certain valuables, such as furs, jewelry, silverware, watches or firearms, to a few thousand dollars. However, you can purchase extra coverage for these items if needed.

Due to the extra coverage it provides, an HO-5 policy generally costs more. HO-5 insurance costs an average of $1,649 annually, compared to an average of $1,569 annually for an HO-3 policy, according to the most recent data from the National Association of Insurance Commissioners (NAIC).

Learn more: Replacement Cost vs. Actual Cash Value

What Is Not Covered by HO-3 and HO-5?

Both HO-3 and HO-5 policies typically exclude the following perils:

  • Floods: You can purchase flood insurance to protect your home against flood damage.
  • Earthquakes: Homeowners in areas at risk for earthquakes can buy separate earthquake insurance to protect their homes.
  • Landslides: Home insurance typically doesn't cover landslides, but earthquake insurance generally does.
  • Sinkholes: In locations where sinkholes are common, you may be able to buy sinkhole coverage as a separate policy or an endorsement to your home insurance.
  • Water backup: To cover damage due to water backing up from a drain, sewer or sump pump, you can buy water backup insurance as an endorsement to your homeowners policy.
  • Insects or animals: Home insurance typically doesn't cover damage from vermin such as rodents or termites. However, it may cover damage that a larger wild animal, such as a bear, does to your home's structure.
  • Wear and tear: Damage caused by wear and tear or poor maintenance, such as a leak due to an aging roof, generally isn't covered by home insurance.

Both HO-3 and HO-5 home insurance also typically exclude:

  • Damage from nuclear accidents
  • Pollution damage
  • Damage due to war
  • Government seizure of your property
  • Damage you intentionally cause

Learn more: What Is Not Covered by Homeowners Insurance?

Should I Choose HO-3 or HO-5?

Consider the following factors when deciding which type of homeowners insurance to choose.

When to Choose HO-3

An HO-3 policy provides solid protection for most homeowners and may make sense for you if:

  • You're on a limited budget. An HO-3 policy usually costs less than an HO-5 policy, which could be important if your budget is tight.
  • You have minimal or low-value personal belongings. You may not need an HO-5 policy if you have few possessions to replace or if your home is furnished with secondhand items.
  • You don't mind receiving actual cash value. If you can spend the time bargain-hunting to find replacement items for less, or don't care about replacing all of your possessions, an HO-3 policy may be all you need.

When to Choose HO-5

The extra coverage an HO-5 policy provides might be a better option for you if:

  • You own high-value personal property. If your home is packed with expensive furnishings or you own lots of possessions that depreciate quickly, such as electronics or designer clothing, an HO-5 policy ensures you can easily replace them. Taking inventory of your possessions can help you determine how much coverage you need.
  • Your area is prone to unusual events. While HO-5 policies still have exclusions that you should carefully consider, they typically provide broader protection for a wider range of perils. This could provide more peace of mind than HO-3 coverage.
  • You can afford the extra cost. Because they offer greater protection, HO-5 policies usually cost more than HO-3 policies.

Learn more: How to Make a Home Inventory List for Your Insurance

How to Get Homeowners Insurance

To buy home insurance, follow these steps.

  • Understand types of coverage. Make sure you understand what homeowners insurance covers, what's excluded and any limitations on coverage.
  • Estimate how much coverage you need. You'll want enough structure or dwelling coverage to cover the cost of rebuilding your entire home if necessary. Your insurance agent or a local real estate agent can help you estimate how much insurance is necessary. You can also inventory your personal possessions to get an idea of how much replacing them might cost.
  • Consider extra coverage. Depending on where you live, you may need flood insurance, earthquake insurance or other specialized coverage. If you have significant assets, you may want umbrella insurance or higher liability limits than the standard homeowners policy provides.
  • Gather information about your home. Insurance companies usually ask for information about your home's age, square footage, roof materials and detached structures on your property. They may also want to know about any safety features you've added or improvements you've made to the home's systems, such as upgrading plumbing or the electrical panel.
  • Get quotes from insurance companies. You can get insurance quotes by visiting insurance company websites, contacting insurance agents or using an insurance marketplace that collects quotes from multiple providers in one place. Be sure you're comparing the same type and amount of coverage, as well as the same deductible.
  • Compare policies and purchase coverage. Read online ratings and reviews to evaluate the company's reputation for customer service. Check the company's financial stability ratings from sources such as A.M. Best, Moody's and S&P. Once you're satisfied you've found the best provider for you, pay your premium to start your coverage.

Learn more: How to Compare Home Insurance Policies

Frequently Asked Questions

The default HO-3 policy pays the actual cash value of personal property. However, for an extra cost, you can usually upgrade an HO-3 policy to add replacement cost value for belongings. Check with your insurance carrier to see how the cost of adding RCV coverage compares to HO-5 policy premiums.

You can typically modify your home insurance coverage at any time. Contact your insurance carrier to find out how to upgrade from HO-3 to HO-5 coverage. If you decide to change insurance companies in the process, or if making the switch requires canceling your current policy and buying another, make sure your new policy is in place before canceling your existing coverage. Otherwise, you could have a lapse in coverage that leaves your home unprotected.

The Bottom Line

There are many ways to lower the cost of home insurance, including increasing your deductible, bundling insurance and adjusting your coverage. Because home insurance carriers may review your credit-based insurance score when setting your premiums, keeping your credit in good shape could help you save too.

Your credit-based insurance score differs from the consumer credit score lenders use, but is calculated using much of the same data. Practicing good financial habits such as paying bills on time and paying down debt may help improve both types of scores. You can check your FICO® ScoreΘ and Experian credit report for free to see if your credit score needs improvement.

What makes a good credit score?

Learn what it takes to achieve a good credit score. Review your FICO® Score for free and see what’s helping and hurting your score.

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About the author

Karen Axelton specializes in writing about business and entrepreneurship. She has created content for companies including American Express, Bank of America, MetLife, Amazon, Cox Media, Intel, Intuit, Microsoft and Xerox.

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