Home Insurance

What Is A Home Insurance Premium?

Learn about all the factors that go into your home insurance premium, and how you could lower your homeowners insurance cost without sacrificing coverage.

What Is A Home Insurance Premium

A home insurance premium is the amount of money you pay to keep your home insurance policy active. It is a recurring payment, and depending on your insurer, you may have the option to pay your home insurance premium either monthly or annually, though some insurers may offer different payment cadences as well. If you own your own home or plan to buy one soon, having an affordable homeowners insurance premium and a policy that protects your residence is important. It’s also a good idea to learn more about the benefits of homeowners insurance, the costs, and how you could potentially lower your premium. 

Why Get Homeowners Insurance?

If you have a mortgage, your lender could require you to have home insurance. With many banks, you can wrap your insurance premium and your mortgage amount into a single payment for ease. In these cases, the mortgage lender sends your insurance premium to the insurance company for you.

People without mortgages don’t have to get home insurance, but it still has many benefits. It can protect you from paying thousands of dollars for unexpected repairs. Many policies also cover loss of use or additional living expenses, meaning that insurance might pay some of your expenses if you need to stay at a hotel or rent an apartment while your home is repaired. It may also pay for meals and other incremental costs you incur while your home is damaged.

A homeowners insurance policy can also help you repair or replace possessions after damage or theft, including clothing, appliances, furniture, and most other items in your home. In addition, liability insurance comes with homeowners insurance, which pays for damages if someone sues you. Policies may pay for liability damages even if the incident happens away from home. For example, your policy could protect you by paying for medical bills incurred if your dog bites a neighbor, whether the incident happened on your property or theirs.

What Goes Into the Cost of Your Homeowners Insurance Premium

When calculating homeowners insurance premiums, insurers consider many different factors, including the following:

Replacement Cost

Replacement cost is the amount needed to rebuild your home if something destroys it. It can also cover the cost of buying new furniture, clothing, and other items. It’s usually lower than the market value of the home because unlike market value, replacement cost does not include the value of the land your home is on.

However, some homeowners insurance policies cover the amount remaining on a mortgage after the down payment instead, which can be less than the replacement value. You may also need to increase your coverage as the replacement value rises because of more costly construction and material expenses.

Some insurers offer a guaranteed replacement cost option, which means the policy would pay to replace the home if it is totaled even if that exceeds the policy’s limits. This is not available from every insurer or policy, though, and regulations can vary by state.

Claims History

Insurance companies often assume that people who have filed many claims in the past are more likely to file in the future. Even if you took reasonable precautions and didn’t cause the damage, filing a substantial claim could raise your premiums.

Marital Status

Insurers assume that married people are less likely to file claims than single individuals, as insurers often view married couples as more stable and less likely to take risks. As such, rates are usually higher for unmarried individuals.

Age of the Home

Older homes often have higher insurance premiums. They could need extensive updates to comply with local building codes before professionals can complete repairs, making many claims more costly. Older houses also have older roofs, plumbing, heating and air conditioning systems, and other components that could eventually fail after years of wear. If you make an improvement on an older home, like replacing the roof, let your insurance company know. You could get a lower premium that may help you pay for the improvement over time.

Location

Insurers consider many risks that are dependent on location, including crime rates and the likelihood of mold or pests. The frequency of severe weather like tornados, hurricanes, fires, or floods is important as well. Location can also lower your premiums if you live near a fire or police station because proximity to these things suggests that should an emergency arise, response would be quick before too much damage can be done.

Overall, insurers base their calculations on risk assessment, also called underwriting. They use statistical analyses to decide on the likelihood of future claims for each policy and determine premiums. Some insurers consider different variables than others, and they may run their risk assessments differently. Comparing several insurers can help you find a lower premium.

Why Your Home Insurance Premium Could Increase

One of the most common reasons for a premium increase is an increase in the replacement cost of your home. If your insurer increases your coverage to take care of the higher replacement cost, they usually ask for a higher premium because the potential expense after a loss is higher.

Your rates could also become higher if you add a trampoline, a pool, or a similar item. Since a visitor or guest could injure themselves while using it, it increases the likelihood of a liability insurance claim. Having a large dog or another pet that might injure someone can also raise your premium. In some areas, premiums may increase because of rising sea levels and increasingly severe weather.

How to Lower Your Home Insurance Premium

In many cases, premiums increase automatically as insurers analyze data and make adjustments after any changes. However, your premium may not automatically decrease because the crime rate in your neighborhood has improved or if you got rid of your trampoline. Fortunately, there are still some ways to decrease your premium when it’s time to renew your policy.

Make Safety Updates to Your Home

Improving your home’s safety can lower the risk of an insurance claim and reduce your premiums. Replacing an older roof makes damage from leaks less likely. If you live in an area with a high risk for fire or severe weather, you could lower your premium by choosing a roof that’s wind resistant or fire resistant. Wind- and impact-resistant windows, storm shutters, and garage doors are also options that could improve your home’s structural safety. 

In addition, upgrading your home’s electrical system can reduce your fire risk, and replacing an old water heater can prevent an eventual leak and water damage. Smart thermostats and other smart devices can quickly alert you when parts of your home need maintenance or repairs. Some devices can also alert you if there’s a gas leak or a freezing pipe. Decreasing the likelihood of structural damage can go a long way in improving the perceived safety of your home.

A home security system can help lower your premium by preventing thefts, especially if crime is high in your area. Features like deadbolts, fire alarms, and doorbell cameras may lead to lowered premium costs as well. 

After you make upgrades to your home, let your insurer know as soon as possible to take advantage of any premium decreases. Some insurers may lower your rate even if your policy isn’t up for renewal yet if the upgrades are significant enough, though this is not guaranteed.

Bundle Your Insurance Policies

Purchasing multiple policies through the same insurer, also called bundling, could help decrease your premium. The amount of the discount varies depending on the company and the policies you choose, such as if you bundle your home and auto insurance with the same company. Bundling also makes paying your premiums more convenient, allowing you to interact with a single insurer instead of sending payments to multiple insurers.

Lower Your Coverage

Reducing your coverage will result in lower premiums, but it exposes you to more risk. You may be able to lower your policy’s limit below the replacement cost of your home, but then you may have to use your savings or get a loan to get your home back to its present condition if it is severely damaged. 

However, in some circumstances, lowering coverage may make sense because. For example, things like furniture can lose large portions of their value over time. If most of your belongings inside your home is several years old and thereby decreased in value, you could reduce your coverage and premium without increasing your risk. Home insurance pays for the value of items like furniture, but it usually won’t pay to replace an old chair or couch with a brand new, identical item.

If you decide to sell or give away a valuable item, like a piece of jewelry, let your insurance company know and ask to remove any riders or additional coverage for the object.

Raise Your Deductible

Your homeowners insurance deductible is the amount you’re willing to pay before your insurance company contributes to a claim. For example, someone with a $500 deductible who needs a new roof after a storm would have to contribute $500 towards the cost of the roof before the insurance company would pay the rest. Even if you filed a claim recently, your deductible would be the same for every claim unless you change it. Most people choose deductibles from $500 to $1,000.

If you can handle a sudden expense, choosing a high deductible can help lower your premium. However, if you want to keep your property in good condition but need to prevent surprise costs, choose a lower deductible.

Pay Your Premium Annually Instead of Monthly

Many insurance companies charge an additional fee for people who make the minimum required payments for their homeowners insurance policies. Most policies have 6-month terms, and they require at minimum monthly payments. You could save by paying for the entire cost of your policy when you purchase it instead of splitting it into those monthly payments.

Some insurers offer a bigger discount for people who buy policies with one-year terms instead of 6-month terms and pay for them in advance. If you can’t pay for your policy in advance, you may still be able to get a comparable discount by signing up for automatic payments from your bank account or credit card. 

Improve Your Credit Score

People with a reliable credit history can often get lower premiums because they’re perceived as less likely to take risks and more likely to plan ahead by completing preventative maintenance and fixing minor issues before an insurance claim is necessary. Insurers use an insurance credit score to help them make risk assessments. This is different from the FICO credit score that lenders use, though it utilizes much of the same data.

To improve your credit score, make payments on time and pay off as many of your debts as possible. If your credit history doesn’t have much information, you can establish a history of on-time payments by getting a personal loan. You can also apply for a credit card, use it regularly, and pay the balance every month. However, ensure that your budget allows for this, otherwise these additional lines of credit could end up hurting your score.

Insurers usually can’t use credit history as the sole reason to raise rates, deny coverage, or cancel a policy. In California, Hawaii, Maryland, Massachusetts, and Michigan, insurers can’t use credit information or credit insurance scores to raise rates or deny a policy. In Oregon and Utah, insurers can’t cancel or refuse to renew your policy because of your credit. However, it can still be one part of many factors involved in their decision. 

Own Your Home

Most lenders require borrowers to get at least enough home insurance to cover the mortgage after severe damage. When you pay off your mortgage, you may be able to reduce your coverage. You can also lower your premium by increasing your deductible and putting the money you were contributing to your mortgage in a savings account. Then, you can use that money to take care of any expenses that your insurance won’t cover.