What Factors Are Used in Calculating Home Insurance Premiums?

The premiums for two identical homes on the same block will likely have different home insurance. That is because home insurance providers use multiple factors in determining the rate for home insurance policies. Some factors are related to the homeowners and some are related to the coverages.

As far as the home, insurance providers will consider the type of construction, foundation, roofing materials, and the number of kitchens and bathrooms.

They will also consider the home’s location and the year it was built. Homes that are nearer to large lakes or the ocean usually have higher rates than inland homes. Insurance companies also give lower rates to homes that are near fire hydrants.

A home insurance application will also ask for your claims history, marital status, and information to check your credit history. Insurance companies use actuarial data to consider how these factors increase or decrease the chance of loss.

The coverages and deductibles you choose also play a role in your home insurance premium. The replacement cost should reflect the true cost to replace your home. You can make choices for liability, medical payments, and deductible, and your choices will impact the premium.

Insurance providers usually offer endorsements and additional coverages to cover risks such as water backup or collectibles for a small additional premium to help you customize your home insurance policy.

According to Bankrate, the average premium for a home insurance policy is about $1393 per year for a home with a dwelling value of $250,000 in the United States. You may be wondering why home insurance premiums are so high. To understand the reasoning behind it, you have to consider the general concept behind insurance. Insurance is a way of managing catastrophic risks by sharing costs. Home insurance companies insure tens of thousands of homes, and they collect insurance premiums from all of them. When one homeowner files an insurance claim for a loss, the insurance company pulls funds from all the premiums that have been paid in to cover the loss.

When a loss involves multiple homes such as a large geographical area that gets hit by a tornado or hurricane, insurance companies may need to raise rates to compensate for how much they have to pay out. Risks also occasionally drop when insurance companies don’t have to pay out large sums for claims for long periods.

Since there are so many factors involved in determining your home insurance premium, it’s beneficial to obtain several quotes before deciding on your preferred home insurance provider.