How is Homeowners Insurance Calculated?

If you’re shopping around for homeowners insurance, you might be wondering how your home insurance premium is calculated. The answer isn’t as straightforward as you might think. Insurance policies don’t have uniform prices – each premium is unique. The reality is that hundreds of variables go into calculating homeowners insurance.

A home insurance premium is the amount of money you pay an insurance company for a specific limit of coverage. When calculating a premium, an insurer will use a proprietary process that estimates how likely you are to make a claim and how much it will cost based on a multitude of factors. Insurers need to balance a fine line between pricing competitively and losing money. If they price too high, they might lose customers, but if they price too low, unexpected, high loss patterns might put them out of business.

Though you might never know every single factor that insurance companies use to determine rates, all carriers tend to follow similar principles. Understanding the basic principles behind how companies determine rates empowers you to understand your premium and identify potential cost saving opportunities.

Here are the biggest factors that impact your home insurance premium.

Location

The location of your home is the most significant factor that affects how homeowners insurance is calculated. Based on your home’s location, carriers will gauge the following:

  • Exposure to natural disasters: When they’re strong enough, natural disasters such as wildfires, tornadoes, earthquakes, and snowstorms can destroy homes. Carriers will look at historic loss patterns and data from hazard maps to determine a property’s risk relative to different natural disasters.
  • Infrastructure’s age: The sewer and stormwater system serving your home impacts its risk profile. Some sewer systems are more susceptible to flooding or backups. Homes in neighborhoods with this negative history are more expensive to insure.
  • Proximity to fire station: Fires are a major concern for carriers. This is why your proximity to a fire station or a fire hydrant impacts your premium.
  • Other loss history: Carriers will also look at loss history not related to natural disasters. This includes events like vandalism or theft.

Home characteristics

The contents of your home and the way that it’s built impact your premium. Older homes are more likely to be prone to loss, while certain upgrades can also impact the rebuild value of a home.

  • Systems: HVAC, electrical, plumbing, and more affect your home’s risk. Older wiring and electric systems can increase the risk of fire while certain plumbing materials are prone to causing water damage. Older HVAC systems carry a higher risk of failing and causing fires or making pipes freeze. Newer systems present less risk and are likely to result in a lower premium.
  • Home’s age: The age of a house also impacts its risk for loss. Newer homes are more likely to withstand perils and have more safety features.
  • Construction materials: The materials and methods used to build your home impacts how susceptible it is to loss. As an example, homes with basements are more prone to flood damage than houses built on concrete slabs.
  • Loss prevention features: Installing devices like backwater valves, emergency water shutoff, surveillance cameras, or sump dumps serve as a defense to risk and can help lower your premium cost.

Personal characteristics

Some of your personal information factors into your home insurance premium.

  • Age: Many carriers will offer an age-related discount on your premium.
  • Credit score: Some carriers will give people with better credit scores a lower premium.
  • Mortgage status: If you’re still paying off your mortgage, you might have to pay more for your home insurance.
  • Claims history: If you have a history of being insured and not making claims, your premium can be lower.
  • Pets: Owners of dog breeds associated with claims will often have to pay higher premiums.

Use and occupancy

Who lives on the property and how it’s used affects your risk and can raise or lower premiums according to those risks.

  • Occupied or vacant: Carriers see vacant homes as riskier because it’s harder to maintain the property so that it doesn’t sustain damage over time. Because no one is on the property, it’s less likely for someone to respond to issues as they arise.
  • Property use: Is the property a primary residence, rental property, or vacation home? Primary residences are typically the least risky and have lower premiums. Vacation homes are often empty, which is riskier in the eyes of carriers. Rental property risk comes from the unpredictability of who’s coming and going on the property. Carriers see unpredictability as more risk, which means a higher premium.
  • Short-term rental: Short-term rentals are properties listed on sites like Airbnb or VRBO are high risk for carriers. The constant coming and going of people on the premise increases the likelihood of damage and liability associated with a home.

Coverage and deductible

After accounting for all of these variables, the final piece of the puzzle is the amount of coverage and your deductible. These are the pricing factors over which you have the most control.

  • Pick a number from HO-1 to HO-8: There are eight types of home insurance, and each is made for different types of properties and provide different levels of coverage. If you want more coverage, you’ll have to pay a higher premium.
  • Deductible: A deductible is the amount of money you agree to pay before your insurance kicks in. A higher deductible comes with a lower premium, and vice versa.

Though there are many factors that affect how a premium is calculated, knowing this information can help you take steps to reduce your risk and lower your premiums. Connect with the Guided team today to learn more about what you can do to make your risk more appetizing in the eyes of carriers, or to ensure that you’re getting the best price for the coverage you need based on your unique risk profile.

Get more insights.

The latest scope on insurance, health, life, and cars.

Leave the insurance to us.

Resources

All health insurance sold is processed through the licensed entity of Baldwin Risk Partners.

Guided Solutions is not affiliated with or endorsed by Medicare or any government agency. Guided Solutions does not discriminate based on race, color, national origin, age, disability, or sex.

Leave the insurance to us.

Resources

All health insurance sold is processed through the licensed entity of Baldwin Risk Partners.

Guided Solutions is not affiliated with or endorsed by Medicare or any government agency. Guided Solutions does not discriminate based on race, color, national origin, age, disability, or sex.