We know that homeowner’s insurance is very important as it helps to protect some of the most valuable assets that one will have in their lifetime. Whether you rent, own a condo, single family home or rental property, have you ever wondered what goes into calculating the premium for your risk? Or why you and your neighbor have the same insurance carrier and live in similar homes, but you pay more each year. It may be a little more complicated than you would think. In this article we will look at the primary factors that insurance companies use to come up with how much to charge you for agreeing to cover these valuable assets.
Most understand that when you are living in a coastal area you are subject to higher rates, but those in rural areas maybe subject to higher rates as well if they are not within a certain distance from responding fire department or are near large source of water. There are other factors that impact our rate regarding the location of the home which includes: proximity to risk factors (i.e. - bodies of water, large forests, nearest fire dept), neighborhood (i.e. – claims and crime history in the area), and weather(i.e. Texas and Florida are both more prone to catastrophic events). Insurance carriers put a lot of research into these areas every year to ensure that they are providing the appropriate rates based on the location of your home, but as you will see throughout this article, just because you and your neighbor live NeXT door to each other does not mean you will have the same rate. There are many other factors that go into the premium for your risk.
Of course, some of the most well-known factors that determine the premium of the insurance premiums are the characteristics of the home itself. The age of the structure, the attached structures/amenities, and the replacement cost (not to be confused with your home’s market value or selling price) are all calculated by the insurance company. Most insurance companies will hire a third-party inspector to complete an inspection report to ensure the replacement cost is correct and that there are not any hazards that weren't advised at point of sale that would warrant an adjustment to the policy or even cancellation in some cases. Maybe, you and your neighbor are in one of those neighborhoods with “cookie cutter” houses that were all built with the same specs and you are wondering, still, why you’re paying more each year. Let’s take a look at the next set of factors which will help to differentiate the rates that you both are paying each year.
Next up we begin getting into some of the factors that are specific to the individual named insured. Personal rating factors are used in determining your rates for your home insurance. The age of the insured is a key rating factor in home insurance as it has been proven that, generally, the older you are, the more time you spend in the home. Now this mayn't be true for everyone, I have a great uncle who always seems to be traveling, but most 78 years old folks statistically are not doing the same. This makes you less susceptible to certain hazards then those of say a homeowner that is 28with 2 kids. Also, your credit-based insurance score plays a large role indeterminant your rate for home insurance in some cases. Just like with your normal credit score, there are a few companies that develop these for insurers. Generally, five different factors are used to determine your credit-based insurance score: payment history, outstanding debt, credit history length, pursuit of new credit and credit mix. Before you become alarmed, this is nonallowed to be used in all states for insurance and if it is, it’s a soft hatband does not reflect on your credit report. You will know prior to securing the policy as it is also required that you be made aware of this before your information is run by the agent quoting the policy. Lastly, your personal belongings are a factor as everyone has different possessions, whether clothing or furniture. Most carriers will give a certain percentage based off of the coverage amount for the dwelling (your actual home), in some cases this will be enough but in others it may have to be increased to ensure property protection for you and your family’s belongings. So even if you have the same home style, and in the same location – you can see why your premiums may vary. Let’s talk about some other factors that impact your home premium.
This last set of factors includes a few that are somewhat in your control that go into the calculation of your home insurance premium. These would include discounts that you may be eligible for to help reduce the premium, as well as the deductible choice that you make for your policy (if you can afford a higher deductible, this will bring down the cost of the policy premium). Selecting certain payment options, bundling your home and auto, making improvements to the home, and adding a security system are just a few examples of discounts that one can become eligible for based on your specific carrier. Also, the claims history of the home (yes the home, not just the individual!); insurance companies look at the entire claims history of the residence, whether filed by you or previous owners and use this to help with rating the risk. Generally, more than one claim at that residence address within the past 10 years will warrant a higher rate for the insured.
As you can see your premium is sort of like a fingerprint – it’s unique to your circumstances! Your location, the unique elements of your home, your personal details, and choices you make all impact your premium. I always advise my clients to please take the time to review your policy at least every two years to ensure that you’re receiving the best rate and to ask questions to your agent to make sure that you understand what exactly is going into what you’re paying for each year.