A homeowners insurance premium is the payment you make to your insurer in exchange for coverage against certain perils, or events, such as fires, windstorms, and theft. You often pay your home insurance premiums annually, but you may have the option to pay in installments directly to your insurer or through an escrow account.
How are home insurance premiums calculated?
Home insurance companies determine premiums by evaluating perceived risks and a property’s value. To do that, insurers consider several factors. Every insurer has a different method for weighing those factors and establishing premiums. As such, it’s common for premiums for the same amount and type of coverage to vary by insurer.
Factors that influence your premium
There are several factors that an insurer considers when determining risk and how much you pay for home insurance.
Location
The location of your home plays a significant role in determining your premium. If you live in a higher-risk area prone to severe weather, crime, or other issues, you may pay higher rates than you would in lower-risk areas.
Insurers also use a protection class ranking system when setting premiums. Your home’s protection class is based on your proximity to a fire hydrant as well as the quality of your community’s fire department and communications systems.
Location can also impact the cost of material and labor after a claim, which insurers will also factor into the cost of your premium.
Home value and construction materials
The more it costs to rebuild your home and replace its materials, the more coverage you’ll need and the more your insurer may need to pay out after a claim. For that reason, higher-value homes often lead to higher premiums.
However, certain materials may actually lower your premiums. For example, homes made of fire-resistant materials may cost less to insure.
Age of home and roof
Newer homes usually have safer, more modern electrical and plumbing systems. They are also more likely to be built with fire-resistant or non-combustible materials. As such, they’re generally a lower risk for insurance, leading to lower rates than older homes.
Insurers also consider the age of a home’s roof, as roofs are costly to repair, and leaks can cause significant damage to your home and personal property. Homeowners often pay more for coverage if their home has an older roof.
Coverage limits
Your coverage limits, or the total amount an insurer will pay after a claim, will directly impact your rates. Policies with higher coverage limits will have higher premiums. Coverage limits usually correspond to the cost to rebuild a home, but other related factors can further impact your premium.
Our guide on how much home insurance you need can help you sort through your options.
Your deductible amount
When you purchase a home insurance policy, you’ll need to choose a deductible, the amount your insurer will subtract from a claims payout. Deductibles can be flat amounts, such as $500, $1,500, or even $10,000, or they could be a percentage of your dwelling coverage, such as 5%. Options vary by insurer, policy, and property location.
Choosing a higher deductible saves you money on your premiums, but you’ll pay more out of pocket after a claim. Choosing a lower deductible results in a higher premium, but you won’t pay as much out of pocket.
Personal factors
Your credit-based insurance score (CBI) is a numerical score based on your credit history, including your payment history, outstanding debt, and length of credit history.
Though it’s not the same as your credit score, a high credit score often translates to a favorable CBI score. Insurers in most states can use your CBI to determine your premium, with lower CBIs often leading to higher rates.
Security features in your home
Insurers may offer lower premiums if your home has risk-reducing security and safety features such as:
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Sprinkler systems and automatic water shutoff systems
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Security cameras, burglar alarms, and motion detectors
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Deadbolt locks and security glass for doors
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Smoke detectors and fire extinguishers
Additional cost considerations
There are other factors you need to consider when it comes to the cost of home insurance.
Policy add-ons
You can add additional coverages, known as riders or endorsements, to enhance your policy. Some endorsements include:
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Additional coverage A. Coverage A is your dwelling coverage, but some insurers offer an endorsement that extends coverage past your limit, such as by 25%.
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Flood insurance. Standard home insurance policies don’t cover flood damage, but some insurers offer flood coverage as an add-on.
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Earthquake insurance. Most homeowners insurance policies also exclude earthquake damage, but some insurers offer earthquake coverage as a rider.
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Scheduled personal property coverage. Adding extra coverage for certain valuables in your home increases the cost of your policy.
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Ordinance or law coverage. If you’re required by local ordinances or state laws to upgrade your property to meet modern building codes, this coverage helps with the added costs.
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Identity fraud coverage. This coverage helps with recovery costs when someone steals your identity.
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Water backup coverage. When added to your policy, this helps cover the cost of damages related to a backed-up sewer, sump pump, or drain.
Replacement cost vs. actual cash value
Homeowners insurance policies can insure your property for its replacement cost or actual cash value.
Replacement cost coverage pays to repair, rebuild, or replace your property to its previous state based on current market prices. It doesn’t take depreciation into account.
Actual cash value policies factor in depreciation when determining your property’s value and adjust for depreciation when paying out the claim.
Actual cash value policies are usually less expensive, but you sacrifice some level of protection in the event of a covered loss.
What’s the average cost of a homeowners insurance premium?
The average annual premium for homeowners insurance in 2021 was $1,411, according to the Insurance Information Institute, but most states have seen significant increases since then. In addition, your premium is based on factors unique to you and your home.
Keep in mind that the average cost of homeowners insurance in your state can help you understand coverage costs as they relate to your state, but those averages aren’t always indicative of what you will pay. That’s because home insurance rates take in factors unique to you and your property.
How to compare premium costs
The best way to compare premiums costs is to get several home insurance quotes. Ensuring that each quote is for the same type and amount of coverage with the same deductible.
When comparing rates between different insurers, consider creating a spreadsheet with entries for each insurer so you can easily compare.
Premiums play an important role in your choice, but it’s also helpful to look at the whole package, including available endorsements, discounts, and customer reviews. You may find that a slightly more expensive policy is a better fit for your needs.
How can you lower your homeowners insurance premium?
There are several ways you can actively work to lower your home insurance premium.
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Increase your deductible. Raising your deductible is an easy way to save on home insurance, but remember that you’ll pay more out of pocket after a claim.
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Bundle insurance policies. Bundling your home insurance policy with another type of coverage, such as auto insurance, can earn you a substantial multi-policy discount. Ask your insurer about additional coverages that may qualify.
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Improve home safety. Sometimes, you can earn home insurance discounts by hardening your home against certain risks. A good example of this is wind mitigation in areas prone to hurricanes. Check with your insurer to see what improvements or upgrades you can make to your home to lower your rates.
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Ask about other discounts. Most insurers offer multiple discount opportunities to eligible policyholders. Ask your insurer what discounts they offer and whether you qualify.
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Maintain a claims-free record. You should use your homeowners insurance to help pay for covered losses when you need it, but you can keep costs lower by minimizing claims. Perform regular maintenance to reduce risks, and, if possible, consider paying out of pocket for minor losses, especially if the cost of repairs is only slightly higher than your deductible.
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Shop around regularly. Your coverage needs and the insurance market often change over time. Review your policy every year before it renews, and consider getting quotes to ensure you’re getting the best coverage for the best rate. However, if you find a more competitive rate, always contact your insurer to make sure you’re receiving all available discounts and that your current policy reflects any rate-reducing or discount-qualifying upgrades you’ve made, like wind mitigation.
How do you pay a homeowners insurance premium?
In general, you can pay your homeowners insurance policy in one of two ways: directly to the insurer or via an escrow account.
If you pay your insurer directly, you can often pay for the full policy term in one, two, or four payments, similar to an annual, bi-annual, or quarterly schedule. Some insurers may also offer a monthly payment schedule.
You can also choose to pay your home insurance through an escrow account. This approach is common among homeowners with a mortgage and is required by some lenders. With this approach, the lender deposits a portion of your mortgage payment into the escrow account to pay your home insurance premium.
Consequences of non-payment
If you don’t pay for your homeowners policy on time or within the grace period, you could lose coverage and be on the hook for any damages that occur before you get your policy reinstated. Even worse, insurance companies may view you as high risk and raise your premiums or outright deny you coverage. If that happens, your mortgage lender may purchase a pricier force-placed insurance policy for you.
What happens if your premium increases?
If your premium increases, you can contact your insurer to discuss the circumstances that may have led to the higher rate. It’s not uncommon for policy premiums to increase after a claim or from year to year.
If your premium increases and you have an escrow account, you’ll likely see the increase reflected in your monthly mortgage payment. If you pay your insurance directly, your bill will reflect the increased rate based on your chosen payment schedule.
Can you negotiate your premium?
You can’t necessarily “negotiate” your home insurance premium, but you can contact your insurance company to make sure you’re getting the best rate and receiving any available discounts. You can also ask your insurer to provide quotes for high deductibles to see how each would affect your premium.
Does your premium change after filing a claim?
Your homeowners insurance premium may increase after you file a claim. Whether or not your premium will increase often depends on the nature of the claim, your insurer, and the state where you live.
How do policy updates affect your premium?
Policy updates can increase or decrease the cost of coverage. For instance, increasing coverage, lowering your deductible, or adding an endorsement can increase your premium. Reducing coverage limits or getting a discount for installing security features can decrease your premium.