15 Factors that Determine Your Home Insurance Rates

Dani Milton
November 3, 2020

The National Association of Insurance Commissioners has released an alarming finding that homeowners insurance rates are rising. The agency found that premiums have skyrocketed almost 47 percent during the last decade. In today’s economy, most people need beneficial ways to lower their homeowners insurance premiums, but what factors do insurers use to calculate these rates? In this article, you’ll learn how insurers calculate your rates. You’ll also learn several methods that can help you reduce your premiums.

What Is Homeowners Insurance?

Homeowners insurance policies help protect you from unexpected events that can damage your personal property. They cover events such as fires, lightning, theft, wind/hail damage and other hazards. These policies also protect you when another person decides to sue you for libel or when they suffer injuries on your property. How Insurance Companies Structure Homeowners Insurance Policies Insurance companies split homeowners insurance policies into three coverages that protect different parts of a property. These coverages include:

1. Dwelling insurance (Coverage A)

It is the portion of your home insurance policy that pertains to the costs of rebuilding and repairing your home when it suffers damage or destruction from a covered peril. These include wind, hail, lightning, and fire-related events. This coverage protects your house and areas, including your roof, plumbing, and built-in appliances. The amount of dwelling coverage you purchase should equal the cost of rebuilding your home in case a complete loss occurs. You shouldn’t confuse this amount with the market value of your house. In case a disaster happens, you won’t lose your land, only the buildings that stand on it. The rebuilding cost must account for local construction and material costs, too. Coverage A doesn’t cover damage from earthquakes or floods, so you’ll need separate coverage policies to protect yourself against any losses.

2. Other Structures Coverage (Coverage B)

This section of your homeowners insurance policy doesn't pay for your house repairs. It covers rebuilding costs for other structures that suffer damage on your property. These areas include garages, sheds and fences. Standard homeowners insurance policies provide 10 percent of the total dwelling coverage to protect these structures. For instance, if you have a $150,000 policy for your home, you'll need $15,000 insurance to protect other buildings. If you own multiple structures, you should buy coverage beyond the 10 percent limit.

3. Personal Property Coverage (Coverage C)

This portion of your home insurance covers the cost to replace your belongings in case a covered peril (wind, fire, hail, lightning) destroys them.

The coverage you purchase will depend on how much it is worth. Generally, insurance companies set the personal property coverage limit at 50 percent to 70 percent of the dwelling coverage policy's amount. If your dwelling coverage is $300,000, your personal property coverage will be $150,000 - $210,000.

4. Loss of Use (Coverage D)

This portion of the standard home insurance policy protects you in the event your home is destroyed or damaged by a covered peril. Loss of use coverage can help reimburse you for the cost to use hotels, restaurants, and other living expenses you may incur during a specified period because your home was uninhabitable.

5. Personal Liability Insurance (Coverage E)

This section protects your covered family members against lawsuits for injuries and property damage. It will cover you in the following situations, such as dog bites, libel, or individuals who trip and fall on your premises. Some homeowners may extend their coverage to protect themselves further from property damage.

6. Medical Payments Coverage (Coverage F)

This area covers the medical costs of a person who suffers injuries on your property and doesn’t sue you. When someone sustains an injury on your property and doesn’t file a lawsuit, you can use MedPay to help pay for his treatment. These include dog bites, slips and falls. These policies don’t cover the transmission of infectious diseases, abuse, or use of controlled substances.

15 Factors that May Impact Your Homeowners Insurance Premiums

Insurance companies use underwriting to calculate your homeowners coverage. This process is similar to the method they use to determine your rates for life insurance and short term health insurance policies. They take into account several factors to determine your quote. They include the following issues:

1. Replacement cost – This figure is how much it would cost to rebuild your home if a covered peril destroyed it. Your insurer may charge you higher rates if your home is more expensive to replace. Homeowners insurance companies set the limit of your personal property insurance at between 50 percent and 75 percent of that for your dwelling coverage. For example, if your dwelling coverage limit is $300,000, your personal coverage limit would be around $150,000 and $225,000. This coverage will depend on the company and the policy you choose.

2. Age – New homes are generally cheaper to insure, compared to older homes that may need more repairs.

3. Construction – An insurance company will evaluate the materials used to construct your home. Homes built from materials that protect it from fires and other perils are cheaper to insure. You may incur higher premiums if it has timber, wood, or other flammable materials.

4. Square footage – Larger homes can be more expensive to repair or replace, and your insurer may charge you higher premiums.

5. Number of primary inhabitants – Insurance companies believe larger households have an increased liability compared to smaller ones.

6. Roof build – Many providers will elevate rates for policyholders that have roofs constructed from flammable materials. Your premiums may lower if your roof has fire-retardant asphalt or other protective materials.

7. Public Protection Classification – The Insurance Services Office developed this tool for property and casualty insurers. It assesses a home’s risk by rating its fire protection services. It measures several categories, including emergency communications, water supplies, fire departments, fire prevention and safety education programs. The best rating assigned is “1,” the worst score is 10.

8. Pets – Insurers companies also consider your pets when calculating homeowners insurance rates. Your insurer will increase your premiums when you own an aggressive dog with a known bite history. It may also hike your rates if you own a dangerous dog breed, snakes or exotic animals.

9. Credit score – Another factor your insurance company will consider is your credit score. Your insurance company will reward you with lower premiums when you have excellent credit. Research shows that individuals with low credit scores file more insurance premiums.

10. CLUE Property Report – LexisNexis, a consumer-reporting agency, generates the Comprehensive Loss Underwriting Exchange report. It contains information about previous claims filed on your property, including those submitted by previous owners. It contains up to seven years of personal auto and personal property claims history.

11. Security and alarm system - Insurance companies favor homeowners that have safety systems because these devices may decrease risks like burglaries and break-ins.

12. Deadbolt locks – These safety devices can reduce the risk of theft, robberies and other property crimes.

13. Neighborhood crime rate – Insurers charge increased rates to people who live in unsafe neighborhoods.

14. Your deductible - It is the amount you must pay out of pocket before your insurer begins paying for your claim. Choosing higher deductibles means you’ll lower your potential benefits, which makes your policy less valuable. It results in cheaper rates.

15. Attractive nuisances – These are hidden hazards on your property that can potentially increase liability claims and insurance premiums. These structures include pools, playground equipment, machinery, swimming pools, ponds, swings and trampolines.

Do you need to identify ways to lower your homeowners insurance rates? Speak with an agent at your local insurance company and find out if you can correct any of these factors to decrease your premium. If you have factors, like your location, that you can’t change, compare these rates with other insurers to see if they will provide lower rates. You can also use SmartFinancial app to compare coverage and premiums with other insurance companies.

How to Calculate Your Homeowners Insurance Coverage on Your Own

Are you unsure how much homeowners insurance you’ll need to protect your property? You can use the following process to find the best coverage for your home in case the worst happens.

Looking for Home Insurance?

1. Use a home insurance calculator.

Online calculators can help you estimate the amount of homeowners insurance you’ll need. These sites will calculate a quote after you answer questions about your home, location, square footage, heating systems, construction and other features.

2. Estimate your home insurance coverage using a formula.

Another method that will help you calculate your rates is the homeowners insurance formula. If you prefer not to use an online calculator, this equation can help you estimate how much it will cost to repair or replace your home. Here is the formula:

Home Square Footage x Price-Per-Square-Foot to Build in Your Area = Replacement Cost

You can find out these values by doing a little research. For instance, you can contact a local building contractor and ask them the average price-per-square-foot in your area. These professionals will ask questions about your home’s construction and materials. They’ll also give you a price-per-square-foot estimate based upon this information. Next, you’ll use this estimated figure and multiply it by your home’s square footage. This calculation will give you a ballpark figure about how much dwelling coverage you’ll need. Additionally, consider how much it will cost to replace your valuables within your home for your personal property coverage. Use the coverage limits from your previous homeowners policy

If you’re switching insurance companies, you can transfer the information from your previous homeowners policy to your provider. Make sure to correct any information to ensure it’s current. Dwelling coverage should be updated biennially to reflect any changes in the cost of construction materials. If the amount fluctuates, your provider will want to see a copy of your policy to verify that the information is correct.

3. Hire an appraiser.

You can also hire an appraiser to get an updated replacement cost valuation for your home’s rebuild price. You should only hire a professional who is a replacement cost specialist. These appraisals shouldn’t include your home’s curb appeal in its replacement cost valuation. You’re looking for an estimate about how much it would cost to rebuild based on current construction materials and labor. Contact your local insurance agent to get a referral for a local appraiser.

4. Take an inventory of all personal belongings.

Next, take an inventory of your belongings to calculate your personal property coverage. These estimates should include any indoor and outdoor valuables you currently own. This step will make it simpler to categorize your items by property location and type. In your inventory, include items such as:

  • Electronics
  • Kitchen appliances
  • Washers and Dryers
  • Furniture
  • Clothing
  • Collectibles and expensive items
  • Sports Equipment
  • Musical Instruments
  • Artwork

As mentioned earlier, your insurance company sets your personal property coverage limit at 50 percent of your dwelling coverage. So, if your dwelling coverage limit is $400,000, your personal property coverage limit will be $200,000.

5. Consider raising your coverage limits.

Several insurance companies will give you the option to protect your things with 75 percent of your dwelling amount. Insure your home at a higher limit, or its replacement cost, and it will generally cost more. If you live in an area with lower risks and a temperate climate, paying additional coverage may not be necessary. Most insurance companies have reimbursement limits or sublimits on rare and expensive kinds of personal property. Jewelry, electronics, instruments, and other items have $1,000 or $2,000 sublimits. To increase these amounts, you can add a scheduled personal property endorsement to your policy for an additional cost to cover items with higher replacement sublimits.

6. Consider coverage endorsements.

Next, see if your insurance company provides additional coverage for things that your standard homeowners insurance policy will not cover. These include:

  • Flood insurance – Separate policy that pays for flood-related damages and house contents.
  • Earthquake insurance – Separate policy that pays for damages to your home and covered items caused by an earthquake.
  • Water backup of sewer – Pays for losses caused by a sewer or drain backup.
  • Personal umbrella liability – Covers losses to your home from
  • Dog bite policies can protect when you have an aggressive dog breed or exotic breeds.

7. Consider your total assets.

Your personal liability coverage (along with the medical payments coverage) is the only part of your policy that isn’t set as a percentage of your dwelling coverage. Insurers set your personal liability limits between $100,000 and $500,000 in $100,000 increments. The coverage you get depends on your total assets and your liability-related risks. In homeowners insurance policies, personal liability coverage is general liability that protects you when someone suffers injuries on your property. If someone sues you, they can go after all of your assets, including ones not connected to your property. The liability portion of your policy may cover your attorney fees.

How to Lower Your Homeowners Insurance Rates

Here are several tips that can help you reduce your premiums.

1. Seek Discounts and Credits.

You can speak with an insurance agent to see if you qualify for any discounts at their company. Many insurers offer decent credits that can help lower your insurance rates.

2. Bundle your homeowners, auto, and other coverage.

You may pay less, on average, if you bundle your policies with one insurer. When you shop for coverage, see how much each bundle will cost by looking at the final price for your rates. Next, compare this bottom-line rate with other insurance companies to get the lowest price. Contact your insurance agent and ask if it’s possible to lower your premium rates by raising your deductible. If you increase your deductible, you’ll be less likely to file smaller claims. It will also encourage you to make the best use of your insurance coverage.

3. Take advantage of loyalty discounts.

Ask if your provider has a loyalty program. Some insurers provide additional discounts to customers if you’ve remained with them for a few years.

4. File fewer claims.

Here are steps specific to homeowners insurance. You can also make several improvements to your home or property to see what you can improve to get a discount.

5. Get a security system.

Consider making your home safer with a monitored security system. Research says that you can get a 20 percent discount on your premium. You can also add motion-sensing lights, upgraded locks, windows, and doors.

6. Insure your home, not your property or land.

You don’t need to insure your home’s purchase price if the majority of its value comes from the land. If you lose your home, you’ll need to rebuild the structure and parts of the landscaping. The actual land itself doesn’t need to be insured. If you get a home appraisal, it should list the value of the improvements, including the things you’ll have to pay to replace. It will help you determine the actual coverage that you’ll need.

Are you seeking a quality homeowners insurance policy? SmartFinancial is an intelligent way to find great coverage at an affordable price. All you’ll need to do is complete our short survey. We’ll provide you with multiple premiums and coverage from local insurance companies. To get started, fill out the form on this page.

Get a Free Home Insurance Quote Online Now.

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