How are Home Insurance Rates Calculated?

As you review your home insurance policy each year, you may notice a change in your rates from time to time. This is not at random, however. Home insurance rates are calculated by insurers based on a variety of different factors.

All of these factors tie into your risk as a policyholder. Risk refers to how likely you are to file a claim on your home insurance policy. The more likely you are to file a claim and cost the insurer compensation, the more you may end up paying for home insurance. Knowing the factors influencing your rates can help you save money on your home insurance policy.

Location

Where you live has a heavy affect on your home insurance rates for a variety of reasons. First, the cost of living will affect the value of your home, which influences your rates. On the other hand, your proximity to a fire station and the rate of crime in your area can also raise or lower your home insurance premiums. Since a high rate of crime can increase your risk of being the victim of theft or vandalism, you may see a similar increase in how much you pay to insure your home to offset the risk. Similarly, living further away from a fire station may hurt your chances of receiving aid for a fire quickly and lowering damage caused. Living closer to a fire station can lower the damage caused by a fire by cutting down on response time.

Credit Score

Insurance providers generally look at your credit score as how reliable a policyholder will be in paying their insurance premiums on time and in full, as credit goes down due to unpaid bills or missed payments, etc. You can build your credit by paying off debts, loans and credit cards.

Claims History

If you have a history of filing claims for your home, an insurer is likely to believe that you may file a claim in the future. This is especially true if you file more than one claim within a certain period of time as dictated by your insurer, such as more than one claim within three to five years of each other. It is important to know when you should file a claim and when it may be more cost effective to pay for damages to your home out of pocket.

In rare cases, too many home insurance claims within a short span of time can raise red flags with your insurer and cause your rates to skyrocket or even lead an insurer to cancelling your policy.

Value of the Home

Every home is different, meaning that how much you pay for home insurance may vary compared to your neighbor’s even in the same neighborhood or similar credit to you. Obviously, as the value of your home increases, so does the amount you will pay to protect it. In general, it is recommended that you carry enough home insurance to cover the total replacement cost value of the home. This is how much it would cost to completely rebuild the home after a disaster, including building and material costs.

It is also important to note that your insurance needs may change as the value of your home changes. If you make any significant changes to your home, you will need to adjust your home insurance appropriately.

Type of Home Insurance Policy

There are different types of home insurance policies you may choose, especially when it comes to receiving compensation.

Ways to receive compensation are generally split into two options: actual cash value or replacement cost value. An actual cash value policy (ACV) provides compensation for loss or damage after accounting for depreciation, meaning that as the value of your belongings goes down, so does the amount of compensation you can receive. On the other hand, a replacement cost value (RCV) policy provides compensation without accounting for depreciation. This time of policy is generally more expensive but it may allow you to further replace your belongings after a disaster.

Deductible

A home insurance deductible is how much you must pay out of pocket before filing a home insurance claim. For example, say your home insurance deductible is $1,000. You must pay $1,000 toward repairs before you can receive compensation from your home insurance claim.

A higher deductible can save you money on monthly insurance premiums, but it also means paying more for your deductible out of pocket.

If you have any questions about your policy or premiums, be sure to ask your insurance agent or compare quotes between multiple insurers to guarantee that you are getting the best rates possible for your coverage needs.