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How Are Home Insurance Premiums Determined?

Homeowners insurance premiums are calculated based on personalized information about you, the location of your home, and risk exposure. Knowing how your premiums are calculated could help you save money.

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Homeowners insurance helps pay for any damages and repairs to your home. On average, 1 in 20 insured homes file a claim yearly, with the most popular claim being property damages from weather. Premiums for homeowners insurance vary by each state, averaging between $750 to $2,000 a month for homeowners.

How Is Your Home Insurance Premium Calculated?

A premium is the amount of money you pay to keep your homeowners insurance policy active and can be paid monthly, quarterly, or yearly. Homeowners insurance premiums are calculated based on personalized information about the policyholder, the location of the home, and its risk exposure.

If you have a mortgage or other home loan, your lender may require you to get homeowners insurance to ensure their investment in the property is protected if anything were to happen to it. 

When calculating the premiums of a homeowners insurance policy, insurers may consider the details about your home, yourself, and your policy coverage.

Details About Your Home 

There are certain details about your home that insurance companies consider when calculating your homeowners insurance premium. 

Replacement Cost 

Replacement cost is the total cost of rebuilding your house from scratch. For example, if your home was to burn down in a fire, the insurance company may have to consider the material, time, and size of your house to rebuild it.

Bear in mind the replacement cost does not include the market value of the house nor the value of the land it is on.

Location 

The location and zip code of your home could affect your home insurance premiums. Insurers may want to look at your neighborhood, crime statistics in your area, and weather patterns. 

For insurers, these factors are important due to the risk that they’re taking on to insure your home. If the risk profile is high such as crime rates, it may lead to a homeowner filing more than one claim in the future. Sometimes, the insurance company may charge you higher premiums or refuse you coverage altogether. Note location does not include the value of the land your home is on.  

Home Age 

The age of your home could affect your home insurance premiums. Insurers may give a higher premium for homeowners with older homes, as they may have more structural and maintenance problems than newer homes. Older homes may require more repairs and upgrades, such as electrical or plumbing systems, therefore making it a greater risk. 

Additional Property Risks

Other property risks that insurers could find risky could be if you have a pool or trampoline. A pool or trampoline may be part of the liability portion of your homeowners insurance. Liability coverage helps pay for medical bills or lawsuits against you for injury or death. 

Insurers may consider that a swimming pool or trampoline is an endangerment to a child. Regardless if a person had permission to use your additional property, you may be liable to anything that happens to the person. 

Details About You

Besides looking at the details of your home, insurers may want details about you, such as your claims and credit history. 

Your Claims History 

Your insurer may request a Comprehensive Loss Underwriting Exchange (CLUE) report that shows any insurance claims on your home made by you. If the insurer sees that you’ve submitted multiple claims on your home, they may increase your insurance premiums. To lower your insurance rate, only file claims when necessary. Having little to no claims shows the insurer that you can avoid losses and maintain your home well. 

Your Credit History 

The higher your credit score, the lower your home insurance rate could be. When looking at your credit history, insurers may consider if you’ve made past payments on time and any other current debt you may have. If you have poor credit, it may be harder to get approved for an insurance rate, or you may have to pay higher premiums. 

Depending on which state you’re in, some states do not allow your credit history to be considered. The following states do not allow this: 

  • Alabama
  • Delaware
  • Florida
  • Illinois
  • New Mexico
  • Oklahoma
  • Texas
  • Vermont 
  • Washington

A credit score ranges from 300 to 850, and the higher your score, the lower your insurance rates could be. Credit is determined by the number and kind of accounts you have, how much money is owed, and how often you miss a payment. You may improve your score by avoiding late payments, paying off your debt, and keeping a low credit card balance.

Details About Your Policy

Insurers may consider your premiums by looking at specific coverages you may want to include with your policy. Coverages may include peril coverage, dwelling coverage, and policy limits. 

Peril Coverage 

“Peril” means an event that results in property damage. There are two types of peril policies: An open peril and a named peril policy.

An open peril policy means that you may be covered in the event of any peril unless stated otherwise. A named peril policy means that you may only be covered with the perils stated in your policy. Named peril policies may be cheaper compared to an open peril policy. The most commonly covered perils are: 

  • Fire and smoke
  • Lightning strike
  • Theft
  • Falling objects
  • Damage from ice, snow, or hail

Note that flood damage, earthquakes, and water damage are always excluded from peril coverage. If you live in an area where your home is likely to be damaged from a flood or earthquake, you may purchase additional coverage for those specific perils through your insurance company.

Replacement Cost vs. Actual Cash Value for Dwelling Coverage 

In the event of a loss, replacement cost value considers how much it would cost to build your house from scratch. This may include today’s cost of labor, materials, and the time it would take to rebuild your house. 

Actual cash value is determined by your replacement cost value minus the depreciation value of your home. When you file a claim with actual cash value, you may only be paid for your home’s depreciated value – not the entire cost to replace your property. 

Deductible Amount

A deductible is an amount that you must pay out-of-pocket first before your insurance coverage kicks in. Deductibles are important to insurers because if the cost of damage is less than your deductible, they may deny your claim. 

The amount of your deductible affects your home insurance premiums. The higher the deductible, the lower your premiums. The lower the deductible, the higher your premiums. 

Coverage Amounts 

When determining how much coverage to get, you should consider: 

  • Local building costs. You may want to know how much it may cost to repair your home before you get home insurance. You could consider the cost of your bathroom tiles to how many bedrooms and bathrooms there are in your home. Understanding how much it would cost to rebuild your home may help you know how much insurance coverage to get.
  • How you use your home. Consider how often you host parties or have family and friends over. This may help you calculate the personal liability portion of your homeowners insurance policy.
  • Your personal finances. If your insurer decides not to cover all of the costs of your property damage, you may have to consider how much you may have to set aside for out-of-pocket expenses. Furthermore, how much you may be able to pay for homeowners insurance each month or yearly.

The higher your coverage, the higher your homeowners insurance premium may be. To balance feeling comfortable with the coverage amount and having the premium fit your budget, here are the main coverages you may need to consider. 

  • Dwelling coverage: Dwelling coverage is a part of your homeowners insurance policy that covers any physical repairs of your home damaged from a peril. You may use the replacement cost value or actual cash value to cover your dwelling replacement cost. 
  • Personal property coverage: This coverage helps cover the cost of destroyed personal items, such as furniture, clothing, or electronics.
  • Liability coverage: If a guest was injured at your home, liability coverage helps pay for a guest’s medical and legal fees. If you or a household member causes property damage to someone, this may be included.

Policy Limits 

Policy limits are the maximum limit that an insurer may pay out per insurance claim. For example, if your limit is $100,000 and it costs more to repair your home, you may have to pay out-of-pocket for the rest of the repairs. The higher the policy limit, the higher your insurance premium may be. 

How to Lower Your Home Insurance Premium 

Here are some tips that may help lower your home insurance premiums. 

Bundle your policies

You may bundle your policies to help lower your home insurance premium. For example, you may bundle your auto and home insurance through one company. This allows you to manage your policies in one place, and insurers may give you a discount if you do so. 

Look for discounts

Some discounts may be offered to the area you live in, or discounts are given based on the homeowner’s profile. For example, a discount can be given if you live close to a fire hydrant or fire department. Or based on your profile, if you’re a current military member or veteran.  

Update your home’s safety 

If you update your home’s safety, you may qualify for a premium discount. Having an older home may be advantageous to a discount, as you may have to update your home to meet modern safety codes. For example, updating smoke detectors, sprinkles, and deadbolts on exterior doors. 

Improve your credit score

Your credit score may affect your homeowners insurance premiums. Improving your credit score could show insurance companies that you’re financially responsible and can pay your bills on time. Here are tips on how to improve your credit score: 

  • Avoid late payments
  •  Pay off your debt
  • Keep a low credit card balance

Pay for minor damages out of pocket 

If something minor gets damaged in your home, such as a few shingles falling off your roof, you could pay out-of-pocket to repair it. Filing too many claims within a short time may increase your insurance premiums. It may be recommended to wait to file for larger claims, such as when a tree falls on your roof due to severe weather.