How are home insurance premiums determined?


Insurance premiums are based on risk that the insurance company is taking on. Thus, two identical houses in different areas may have different premiums and two different houses in the same street may also be charged with different premiums. This is because they present different kinds of risks based on the various factors the insurance company will evaluate.

These include the following factors:

  • Your address.

    Some areas are more prone to break-ins, thefts and natural disasters than others. For instance, neighborhoods beleaguered with gang fights or are near areas that are prone to civil disturbances (i.e. places near the city hall where protests are more likely to occur will have higher premiums.

    As to natural calamities, there are areas that have a higher incidence of natural catastrophes. For example, coastal areas (i.e. Florida) are more prone to storms, while there are areas that have a higher incidence of earthquakes and fires (such as California).

    The insurance company keeps records on the claims experience in a neighborhood. The claims statistics include the type of claim, the cause of claim and the frequency of the claims.

  • Type of policy.

    There are basic, no-frills policies that cover only a specified number of risks. There are also broadly-defined policies that cover almost everything except what is specifically excluded. (Read this Q&A to learn more about the various types of policies.) The type of claims payments the policy makes will also hugely affect the premiums. A replacement cost policy is much more expensive than an actual value policy. Also, the more additional options you choose (see Extra coverage for more information), the higher your premiums.

  • Level of fire protection and security.

    If there are two identical houses on two ends of the same street, the house nearest to a water source will have lower premiums than the house farther from these (all things being equal). The same goes for the house’s proximity to a fire or police station. The nearer these are to your house, the faster they could respond in case something untoward happens.

    For instance, if your house catches on fire, the nearness of the fire hydrant and the speed by which the firemen respond will more quickly put out the fire, decreasing the cost of rebuilding or repairing any damages to your home.

  • The value of the home.

    This includes the local cost of labor and materials. The minimum wage per state will differ. This, as well as the cost of materials, will affect the amount you need to have your house rebuilt. (Read here about how insurers determine the value of a home)

  • Structure of the house, type of construction and materials used.

    • Materials (wood, brick, stucco siding, concrete or steel frame).

      It actually depends on where you are. In earthquake-prone areas, wood and more “flexible” types of materials may be considered better than brick and concrete. However, in areas where forest fires are prevalent, concrete, steel frame or brick houses are better than wooden houses. Also, houses with high-end fixtures will be more expensive to insure.

    • Contents of the house.

      Antiques and valuable collections will considerably increase premium rates. This does not only mean that you will need a higher coverage for your personal property. It may also mean that your house is more prone to theft and break-ins because of its contents.

    • Existence of loss prevention devices as well as structures that are considered risks.

      The installation of security and safety devices can help lower insurance premium rates. On the other hand, if you have a swimming pool, this can increase your premiums as its existence increases the risk of flooding, as well as liability claims.

    • Age of the house or the age of plumbing or electrical systems.

      The age of the house and its major structures (the roof, electrical system or plumbing) may make a house more vulnerable to damage. The older the house, the more susceptible to damage. For instance, when a house’s pipes are old (galvanized or lead piping), it can be more prone to leaks or sudden bursts of water. The poor condition of the electrical system may render the house more vulnerable to fires.

    • Stoves and heating systems.

      The use of a wood-burning stove or oil tank can mean an increased fire hazard and increased premiums.

  • Amount of deductible.

    Before you can make a claim, you will need to cover the deductible. The higher the deductible, the lesser the premiums. Conversely, the lower the deductible, the more expensive the policy.

  • Your house’s claims and credit history.

    The insurance industry keeps their records of claims, called the Comprehensive Loss Underwriting Exchange (CLUE). This shows how much claims have been filed on a certain address. Any claims already made on the house will affect the premiums. In the same way, insurance companies will also look at your credit score. This is an indication of your financial standing and your ability to maintain the home and ensure that it is safe and secure against damage and break-ins.

What is a good deductible for house insurance?

Since a deductible significantly affects premiums, it is also helpful to consider the amount of deductible that is ideal for your situation. So it’s our turn to ask: How much can you shell out of pocket in case you need to make a claim?

Types of Deductibles

The different types of deductibles you may have:

  • Percentage deductible. Most home insurance deductibles are based on a percentage of the face value of the policy. For instance, if you have a 2% deductible on a $150,000 policy, you will first pay $3,000 before the insurance kicks in.
  • Split deductible. For fire, tornado or earthquake prone areas, the policy may have multiple deductibles depending on the type of covered event. Thus, you can have a different deductible for fire, another for earthquakes or wind and hail.
  • Flood insurance deductible. Usually, floods are excluded from coverage. However, you can get separate coverage from flood insurance policy providers and have a separate deductible for this.

But remember, the higher the deductible, the higher the premiums. This means keeping a balance between how high a premium you can afford, as well as how high a deductible you can pay off.

Here are additional questions you can ask to help you determine the right deductible for you:

  • What is your level of savings? How much money can you get access to on short notice? Will you need to make a loan or a cash advance on your credit card? Will you need to sell some assets?
  • Compare the difference in premiums and the difference in the deductible. Is it worth settling for a higher deductible in exchange for lower premiums?
  • What is your claims experience? Have you have made a claim? How often?
  • What is the probability of a natural disaster in your location?
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