What Factors Does My Homeowners Insurance Company Use When Calculating My Premium?

The average cost of homeowners insurance is around $186 per month but your actual rates will vary based largely on how likely you are to file a claim.^[1] To calculate your risk exposure, insurance companies consider several factors including the age of your home, your claims history, if you have amenities that increase your liability exposure like a pool or trampoline and more.

Keep reading to learn more about the different factors that affect homeowners insurance premiums and ways you can reduce your homeowners insurance costs.

What Factors Affect the Cost of My Homeowners Insurance?

Below, we’ll discuss different factors that home insurance companies assess when calculating your rate, including the condition and location of your home, alongside personal information about you and your living situation.

Location

Where you’re located can affect your home insurance premiums. For example, living in an area with a high crime rate may make you more susceptible to burglary or vandalism claims, contributing to higher premiums. If you’re shopping around for a new home, research the area’s local risks to get an idea of how it will affect your home insurance premium.

Replacement Cost of Home

If you have a luxury home with expensive materials or extensive square footage, your premium may increase because of its higher replacement cost if it is destroyed. Additionally, some areas of the country may have higher rebuilding costs because the local price of labor and construction materials may be higher in some areas than others. Still, it’s always worth calculating the replacement cost of your home, as you may discover that you either do not have enough dwelling coverage or you’re paying extra for coverage you may not need.

Deductible

Increasing your deductible — the amount you must pay out of pocket when you file a claim — can decrease your monthly premium. Here’s a quick example of how taking a lower deductible often results in higher premiums:^[2]

Homeowners insurance deductibles commonly range from $500 to $2,000, with a flat $1,000 deductible being common.^[3] Keep in mind that some policies may have separate deductibles for certain events depending on where you live, such as for storm and wind damage in states known for frequent hurricanes. Paying this separate deductible may not count toward your policy’s standard deductible, so check your policy details before choosing a homeowners insurance policy.

Credit History

Credit scores are often used when calculating insurance scores, which in turn can affect your insurance rate, as some insurers consider financial history a risk factor. Some states, such as California and Hawaii, prevent using credit history to determine rates, while others, such as Texas and Washington, prevent the lack of a credit history from determining rates.^[4]

Marital Status

Getting married may lower your homeowners insurance premium, as insurers may see married persons as more responsible than single persons.^[5] However, some states, such as Hawaii or Massachusetts, outlaw marital status as an underwriting factor when calculating homeowners insurance rates.^[6][7]

Home Age

Older households are often subject to higher homeowners insurance premiums because of the older materials used in their construction and they may have outdated systems. For example, older electrical wiring may make your home more susceptible to fires, worn-down plumbing could result in a burst pipe and rotting foundations could result in structural damage or collapse.

Here’s a quick breakdown of how the age of your home could affect your insurance rates, on average:^[2]

Depending on your insurer, you may be able to lower your rates for an older home by renovating it.

Roof Age and Condition

Old or worn-down roofs will likely increase your insurance rates. Weather and exposure to the elements can impact your roof more extensively than other parts of your home, degrading a roof’s stability over time and increasing the chance of leaks or other damage that could lead to a claim. That’s why you might see a premium reduction if you replace your roof. A new roof that could better protect your home against weather conditions could help reduce your rates by 5% to 20%.^[8]

Add-Ons

Adding various add-ons or riders to your policy can expand your coverage but at an additional cost. For example, umbrella insurance helps provide coverage if you make liability claims that surpass your insurance limits. Your home insurance policy may not include coverage for certain natural disasters, such as earthquakes or floods, and you could warrant purchasing add-on coverage like flood insurance or earthquake insurance.

In addition, home insurance providers can limit coverage for personal property, so if you have costly items in your home like jewelry that are subject to sublimits, it may be worth scheduling personal property to provide coverage closer to their replacement value.

Distance From Fire Hydrant and Emergency Services

If you live near a fire station, a firefighter can likely extinguish a blaze within minutes, reducing the spread of damage and subsequently, the cost of repairs that your insurer will have to cover. When choosing a home, it’s worth researching its homeowners insurance protection class, which grades how easily a fire can be prevented or suppressed at your home and may influence your rates.

Of course, you will ideally want a home with a favorable fire protection score, which usually signals that your home is close to a fire station and a fire hydrant and the community has backup water reserves for extinguishing fires.

Amenities

Certain amenities like trampolines or swimming pools may increase your homeowners insurance rates, especially if children frequent your home, either your own or those of family and friends. These amenities are often called “attractive nuisances” in that they both draw in children and pose a potential liability because they can lead to accidents that might result in a claim. For example, if you have a tree house, there’s an increased risk of a child falling out of it and you filing a liability claim and as a result, insurers increase your rate to offset that risk.

Home Security

Installing home security and alarm systems can result in lowering your premium. Insurance carriers favor homeowners with safety systems because these devices may decrease the risks of burglaries and break-ins and may even offer a discount to incentivize this move.

Local Weather Conditions

If your home is in an area with frequent local perils, such as wildfires, your rates could increase due to the higher risk. For example, home insurance premiums in Oregon have increased by nearly 30% over the last four years due to the increased risk of wildfires.^[9] Similarly, you may pay higher premiums if you live in an area like part of the country with severe weather, like Tornado Alley.

Dogs

Your insurer may increase your premiums when you own an aggressive dog with a known bite history. While some insurers will exclude coverage for certain dog breeds or increase your rates for owning certain breeds of dogs, even a single instance of biting could result in higher premiums to account for the risk of it happening again.

Claims History

In many cases, filing a claim is necessary but you should keep in mind that a single claim could result in higher premiums. For example, filing a windstorm claim can increase rates by 9%.^[10] Most claims will remain on your record for five years, but it could affect your rates for up to seven years after you’ve made the claim.^[11]

As a result, you should reconsider filing a claim if the loss just barely meets or slightly exceeds your deductible. Paying increased rates over time can sometimes offset any savings made from filing a claim and you may be better off paying for the loss out of pocket.

How Can I Save On Homeowners Insurance?

Below, we’ve listed some possible ways you can save money on homeowners insurance.

• Increase your deductible: You can typically offset your premium by taking a higher deductible. If you’re unlikely to make any claims during your policy period, opting for a higher deductible could help you save.
• Bundle your homeowners and auto insurance: Your insurance company may offer bundling options for a homeowners policy, auto insurance policy and other forms of coverage, which could result in a reduced premium when purchasing combinations of two or more by 5% to 15%.^[12]
• Fortify your home: Protecting your home can help reduce your premiums, with safety features like smoke detectors, burglar alarms or deadbolt locks potentially resulting in discounts of at least 5%. If you install a home sprinkler system with an alarm system that automatically contacts emergency services in the event of a fire or break-in, you could earn a discount of as much as 15% to 20%.^[12]
• Ask about other discounts: Many home insurance companies offer discounts for various actions you can take to prevent risk. For example, if you’re retired and over 55, you may get a discount of up to 10%, as retired individuals are less likely to be burglarized or have house fires due to spending more time at home.^[12]
• Avoid filing home insurance claims for small losses: Filing a claim often results in a higher premium, and the reimbursement for some potential claims may not be worth the increased cost of your premium.
• Improve your credit score: If your state allows for your credit score to be used as an underwriting factor, then improving your credit score can help lower your rate over time. Ensure you pay bills on time and don’t overload your credit cards to keep a good credit history.
• Remove your trampoline: Removing potential hazards like a trampoline can reduce your liability exposure, which also reduces the likelihood of you filing a claim due to somebody getting injured.
• Shop around: Compare quotes from at least three to five different insurance companies to ensure you get the best value at the best rate. Click here to use SmartFinancial to help you compare quotes quickly and hassle-free.