How the Homeowners Insurance Premiums Are Calculated

Anbarasan Appavu

You probably wouldn't buy a new car without checking out its gas mileage, so why buy a house without looking into insurance premiums first? It's not uncommon for buyers to forget about home insurance until the last minute before closing, at which point they rush to find a policy, sometimes going with the first company they contact. 

Doing so can lead to paying more for protection than is necessary. It's smarter to keep your insurance requirements in mind as you look for a home, and it can serve as a useful filter. Consider the potential increase in your homeowners insurance premiums if you fall in love with a home but then find out it's located in a flood plain.

Insurance companies make their living by assessing potential threats to their clients. Your home insurance premium will be lower if it is deemed to be a lower risk. In order to calculate your final cost, the following variables are taken into account:


A real estate agent has stressed the significance of location to you. However, it is also relevant to your insurance agent. That's because your policy's premiums will directly correlate to the level of risk associated with your home's location. Think how much greater the danger of fire damage is when homes are constructed extremely close to one another, and you can see why a home in a densely populated area will cost more to insure. The distance of a house from fire hydrants and fire stations is a factor in home insurance costs, so keep that in mind as you tour potential properties.

If you live in a dangerous neighbourhood, your location is also important. Your provider will increase your premiums to cover the increased risk of theft, vandalism, and other acts of criminal mischief. There is a correlation between the home's location and its vulnerability to natural disasters like hurricanes and tornadoes. However, standard homeowner's insurance typically does not cover damage caused by floods, earthquakes, or mudslides, so you will need to purchase additional policies to cover these.


Your premiums may also be affected by your home's design or construction. An insurance company can gauge your overall risk level based on the age and material of your roof. Anything less than ten years old is preferable, but newer is always preferable. For "impact-resistant" roofing materials like steel and aluminium, some service providers offer discounts of up to 10%. The electrical system of your home will also be evaluated, with circuit breakers typically being less expensive than fuse boxes.

The premium will also be affected by the home's market value. Dwelling coverage is the portion of homeowner's insurance that helps pay to rebuild your home after it is destroyed by a covered peril, like a fire or a tornado. That number is calculated by multiplying the size of your home in square feet by the cost per square foot of building materials in your area (there's that location thing again). Your monthly premium will increase in direct proportion to how high that number is.

Various Other Factors

Homeowners insurance typically covers more than just the house itself in the event of a disaster. It also protects the homeowner's belongings and provides liability coverage in the event a visitor to the home sustains an injury. There is a base level of coverage of $100,000, but you may want to consider paying more per month to increase it to $300,000 or $500,000. You may want to consider increasing your contents coverage if you have valuable possessions such as jewellery, artwork, or electronic equipment, as payouts tend to be lower for these categories.

Your premium may increase if you own a trampoline, a swimming pool, or a specific breed of dog.

Calculating Your Credit Rating

Of course your credit history will play a role in determining the terms of your mortgage. A lower interest rate is more likely if your credit is excellent. However, it may come as a surprise to learn that it also impacts the cost of your insurance.

Your credit score is one factor insurers consider when determining your claim risk. Your premium will be less expensive if you have good credit.

They will also look at your past claims. They will charge you more for homeowner's insurance if you have a history of filing multiple claims in the past. Not filing a claim within the past decade could result in a 20 percent discount on your premium.

Workplace discounts

The cost of building a house and furnishing it can seem to rise with every decision you make, but there is some good news. There are ways to reduce the cost of insurance that you should consider as you shop for a new home.

Providers of homeowner's insurance offer reductions in premium, or discounts, when certain aspects of a home, or its occupants, result in a lower than average number of claims being filed. It's common for insurers to offer premium discounts for safety devices like smoke alarms, which can reduce your monthly payment by 5 percent. An alarm system can get a discount of up to 15%. The amount of a discount varies not only by provider but also by state (location, again).

You can save as much as 20% on your premium by bundling your auto and home insurance policies with the same company.

Increasing your deductible is another strategy for decreasing your premium payments. In the event of a claim, the first amount you will be responsible for paying is the deductible. When you take on more risk by raising your deductible, your monthly premium is reduced by the insurance company. You should, however, set aside enough cash in case you need to file a claim to cover this higher deductible.

The bottom line

Before approving your mortgage, your lender will want to see proof that you have home insurance. Isn't it preferable to know the total cost before beginning the process? Otherwise, it's like buying that gas guzzler of a car: a good deal at the dealership might not seem so great after a few fill-ups.

This is why it's important to factor in the expected cost of homeowner's insurance when determining how much money you can put toward a home.


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