How Is Home Insurance Calculated

If you’ve ever shopped for home insurance, you probably noticed that quotes vary from company to company. That’s because there’s no standard formula across the industry to calculate your homeowners insurance rate. Additionally, not all factors are considered in every state. Let’s examine some of these factors.

Factors that may be used to calculate your rate

Anything that a home insurance carrier sees as a potential risk might impact your annual premium. These could include factors such as the location of your home, the age of your roof and how many home claims you’ve filed in the past. Not all insurance carriers give these factors the same weight, however. This explains why you may get different quotes for the same property.

Location of home

Homes located close to the coast are sometimes considered high risk in areas where property is more likely to be damaged by high winds and flooding. As a result, insureds in at-risk areas might pay more for their homeowners insurance coverage. The same thing holds true for people who live in zip codes with high crime rates.

Size of home

The size of your home may also affect the cost of homeowners insurance. Because a small ranch house is typically cheaper to rebuild and replace than a larger, more complexly-constructed house, the cost to insure of the smaller home might be less. The same principle applies to your personal belongings. If your home is filled many valuable items, the cost to insure those items will typically be higher.

Age of home

The age of your home could impact your insurance premium, as well. Typically, newer homes are cheaper to insure than older homes because they’ve endured less wear and tear over the years. As a result, the structure of a newer home, as well as its systems, are less likely to cause you problems.

Distance to fire station

Another determining factor is the distance between your home and the nearest fire station. Obviously, it’s an advantage if you live close to a station, as firefighters will have a better chance of saving your property. A property that’s located 15 miles from the nearest fire station, for example, will cost more to insure on average than one that’s only a mile away.

Amount of coverage

How much coverage you have also factors into the cost of your annual insurance premium. For example, you may decide to add extra coverage for particularly expensive items like jewelry or art. Or you may decide to increase your personal property and personal liability coverage limits.

Past claims

Home insurance carriers might consider the number—and severity—of home claims that you have submitted over the years. The more claims that you file, the higher your home insurance rate might be.

Credit score

Personal attributes, like your credit score, can also affect your home insurance rate in some states. If you have a good credit score, the cost of your insurance may be lower.

Lifestyle choices

Certain lifestyle choices can affect the cost of your home insurance, too. For example, having a swimming pool or owning certain breeds of dogs can increase your personal liability risk.

What is risk assessment

Risk assessment in the insurance industry involves identifying, analyzing and evaluating risks associated with your property. This process helps carriers determine the likelihood and potential financial impact of various risks.

Here are the three steps that many home insurers use to calculate insurance costs and coverage limits:

How much coverage do you need

Once you understand the factors that carriers use to calculate the cost of home insurance, the next step is to determine how much coverage you actually need. This will ensure that you’re getting an insurance quote that’s right for you.

A home insurance policy consists of several coverages working together to provide you with overall protection. While each home policy has its own conditions and exclusions, nearly all standard policies include coverage in three major areas: your dwelling, personal property and personal liability.

Of course, not everyone needs the same amount of home insurance. For a better understanding of what’s right for you, consider the guidelines below.

Dwelling coverage

The amount of dwelling coverage you need is determined by the estimated cost to rebuild your home if it is completely destroyed. Your independent insurance agent or a construction expert can help you determine that figure, so you may want to ask them for help.

Whatever the overall rebuilding cost is, you should make sure the dwelling limit in your homeowners insurance policy is enough to cover it. For example, if the cost to rebuild your home from scratch is approximately $290,000, you might consider setting your dwelling limit at around $300,000.

Personal property coverage

You may also want to make sure you have enough personal property coverage in case you need to replace all of your belongings. The best way to determine that amount is to create an inventory of everything you own—from furniture to electronics to clothing—and then estimate the value of each item.

Most policies offer personal property coverage that is between 50% and 75% of your home’s dwelling coverage amount. Therefore, if you have $300,000 of dwelling coverage, you might have between $150,000 and $225,000 of coverage for your personal belongings. Remember, you can always increase that coverage if you want.

Personal liability coverage

Personal liability coverage may cover costs if you are sued or held legally liable for another person’s injuries or property damage. For example, let’s say someone slips and falls in your kitchen. Personal liability coverage may help pay for the injured person’s medical bills and any legal expenses you incur up to a set dollar limit.

On a standard home insurance policy, personal liability coverage is typically $100,000. For some, this isn’t enough coverage, but fortunately higher limits are often available. If you have significant assets, you may want extra liability coverage. In that case, you could purchase an umbrella policy from your insurance company.

Potential ways to lower your premium

While you may not be able to control certain risks, there are things you could do to potentially lower the cost of your home insurance premium—or at least keep it in check.

Bundle your policies

If you haven’t already done so, consider bundling your policies with the same home insurance carrier. You can often get a discount for bundling your homeowners, condo or renters policy with an auto or motorcycle policy. Bundling also works with an umbrella policy.

Take advantage of other discounts

All insurance carriers offer a variety of discounts to help you lower the cost of your home insurance policy premium, whether you live in a house, condo or apartment. For example, you could save if you choose paperless billing or if your home is equipped with internet-connected devices that alert you in case of theft, fire or water damage.

Tailor your insurance coverage

It makes sense to only pay for the insurance you need. That’s why you should review your current home insurance policy each year. Consider removing any coverages that don’t apply to your particular situation and make sure your dwelling insurance limit reflects what your property costs to replace.

Increase your deductible

Did you know that choosing a higher deductible can lower your insurance premium? Smart homeowners have figured out this makes sense, as the chance you’ll ever file a claim is small. Not surprisingly, more and more people are raising their deductible every year.

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This article contains general industry information concerning the topics discussed. However, applicability will vary by insured and insurer and from state-to-state. If you have any questions concerning your specific circumstances, you can speak with an insurance professional of your choosing.