Purchasing a home can be one of the biggest decisions a person has to make in their life. If that was not already hard enough, figuring out what type of home insurance policy to get is an equally tough choice. Depending on your personal preferences and lifestyle, figuring out what type of insurance policy to get may not be as difficult once you understand the differences.

The first type of policy is known as a bare bones policy – in the industry often referred to as an HO-1. It primarily includes hazard insurance and liability insurance. Liability insurance refers to when there is an accident on the owner’s property, and with this type of insurance they are not legally held liable for injuries resulting in said accident. The next policy, known was an HO-2, covers an owner’s complete property – such as other buildings, personal property, as well as the aforementioned liability insurance. Depending on where you live and the size of your property that may help you choose between these two types of policies. The most common insurance policy is known as an HO-3. This covers the items mentioned in the previous policies, as well as specific weather related conditions such as flooding, earthquakes and water damage. This type of policy is recommended for homeowners living in areas with unpredictable weather and history.

There are two other less common policies that include cash value and replacement value. Cash value refers to the original purchase price the owner paid for the home, minus the standard depreciation of the house – more commonly known as wear and tear. Even if the appraised value of the house is higher, the homeowner cannot claim a value of more than the cash value minus depreciation. Replacement value refers to the cost to replace or repair the house and the items inside. This does not take into consideration the cash value or the original purchase price of the home. While this tends to cost more, it guarantees that the homeowner gets a certain amount of coverage regardless of changing market or weather conditions that may happen in the homeowner’s future.