Factors that impact your home insurance rate

The average annual premium for homeowners insurance in the United States is $1,312. Homeowners, on the other hand, are likely to see a significant variation in state averages. For example, in Oklahoma, the annual premium could be $3,519, whereas in Hawaii, the premium could be as low as $376. So, what factors influence home insurance rates? Every insurer evaluates the risk of insuring a specific home, which includes estimating the number of claims that will most likely be paid.

Weather is only one of several factors that influence home insurance rates. Oklahoma, located in Tornado Alley, is a high-risk state with higher average premiums. Other locations, such as Hawaii, may not face as many or the same significant natural disaster threats. However, while the likelihood of catastrophic natural disasters has an impact on home insurance premiums, it is far from the only factor.

Factors that impact your home insurance rate

Earl Jones of the Earl L. Jones Insurance Agency in Sunnyvale, California, explained that “home insurance companies use a cost estimator to determine the initial replacement cost of the home” in order to determine appropriate premiums for a policy.

Jones went on to say that determining how the insured's home compares to others is an important part of the process. Jones explained that replacement value is “typically based on the national average for similar homes.” “There are three to five types of homes: standard, average, above average, premium, and custom. The tool analyses specific home components — the number of bedrooms/bath[s]/square footage/year built, for example — to determine how much it will cost to rebuild the home from the ground up.”

Replacement cost

According to Sean Harper, co-founder and CEO of Kin Insurance, the more your home costs to replace, the more you will likely pay in insurance coverage.

“Replacement cost considers many variables, such as your home's total square footage, local construction costs, the home's construction, its unique features and architecture, number of rooms, and so on,” Harper explained. “However, you can get a rough estimate of replacement cost by multiplying the square footage of your home by the local construction costs per square foot.”

Harded went on to say that "people frequently confuse the home's market value with its replacement cost." The numbers may match, but it is not guaranteed because your home's replacement costs may outweigh or fall below its current market value. This is because market value takes into account how intangible features like the neighborhood, view, land, and proximity to local amenities influence a property's attractiveness to buyers. Replacement costs, on the other hand, only refer to the cost of rebuilding a home following a loss.

Credit history

Many insurers, like bank lenders, check homeowners' credit when determining the level of risk they are willing to take on. A good credit score may lead to being perceived as a lower risk, and rates are frequently reduced as a result. Credit is frequently used by insurers as a predictor of your ability to make timely premium payments. Furthermore, insurers believe that homeowners with poor credit are more likely than homeowners with excellent credit to file claims under their policies.

“In states where credit is permitted, most insurance carriers use it as part of the rate-setting process,” said P.J. Miller, partner and independent insurance agent with Wallace & Turner Insurance in Springfield, Ohio. “While it is only supposed to be a ‘portion' of the rate calculation, most people believe it plays a significant role in determining the price of homeowners insurance.”

Claims history

Insurance companies frequently make decisions based on patterns of behavior. When a homeowner files a claim, the homeowners insurance company assumes that the homeowner will file additional claims in the future. A history of filing numerous claims may indicate a higher risk to the insurance company.

Miller went on to explain how the type and number of claims you make can have an impact on your rates. “Even if claims were made in a previous home,” Miller explained, “this history will follow you.”

Marital status

Marriage can affect insurance rates for a variety of policies, including home and auto. Because of the assumed lower risk, insurers will typically charge lower rates to married couples. The chart below depicts insurers' general thought process when calculating rates based on marital status.

Age of home

If you live in an older home or one that would require extensive improvements if rebuilt, your home insurance premium will most likely be higher.

According to Miller of Wallace & Turner Insurance, age and location are important factors in determining the cost to rebuild a home. “Insurers will determine rates based on the difficulty of replacing or repairing your home,” Miller explained. Roof replacement, upgrades to your electrical, heating, or plumbing system, and the installation of a security system, he says, "can all positively impact your rate as the likelihood of a loss declines."

Any improvements to your home should be reported to your insurance agent, according to Miller.

Deductible

The amount you will pay out of pocket for homeowners insurance is determined by the deductible. Accepting a higher deductible lowers your premium, but it may cost you more in the event of a claim.

“Many insurers also offer disappearing deductibles, which means they reduce your deductible if you don't file any claims for a specified period of time,” Miller explained.

Surprising factors that impact your home insurance rate

Though the factors mentioned above regarding a home's construction, history, and the insured's financial background are important, there are many other factors considered in determining rates that are frequently overlooked.

• Distance from water: According to Harper of Kin Insurance, “the closer a home is to the coast, the more likely it is to experience flooding or hurricane damage, and this tends to raise the cost of insurance.” “Flood zones play a key role in whether or not you need flood insurance,” writes Harper. You must have flood insurance if you have a federally backed mortgage, such as an FHA loan, and your home is in a high-risk flood zone.”
• Filing small claims: According to many insurance companies, filing even a small claim indicates that you are likely to file more claims, possibly larger ones, in the future.
• Living near a fire station: Wherever you live, the proximity of your home to a fire station is likely to affect the premiums you pay for home insurance. The closer you are to a fire station, the more likely it is that a fire will be quickly extinguished, preventing severe damage or total destruction of your home. To assess fire prevention, the insurance industry generally employs the Insurance Services Office's (ISO) Fire Suppression Rating Schedule (FSRS). The lower the score on a 10-point scale, the safer the home from fire risk. If your house is more than five miles from the nearest fire station, the rating will be set to a ten.
• Dog breed: Pets and dog breeds may also impact your rates. “Some companies will simply raise your rates to account for the increased ‘bite risk,” Harper explained. Certain dogs may even be completely excluded from homeowners coverage. “Even if your dog is not a ‘restricted breed,' a bite history may affect your rate or ability to obtain coverage,” Harper explained.
• Attractive nuisances: If you have attractive nuisances, or things on your property that could be potentially dangerous and appealing, especially to children, your homeowners insurance rates may be higher. Swimming pools, trampolines, treehouses, wells, fountains, swing sets, construction projects – anything enticing that could attract trespassers or increase the risk of an invited guest being injured – are examples of attractive nuisances, according to Harper.

This is merely a snapshot. There are numerous additional factors that may be considered in your homeowners insurance, so determining which factor has the greatest impact on insurance premiums may be difficult.

For example, Earl L. Jones of the Earl L. Jones Insurance Agency mentioned several factors that could affect rates, such as living in a wildfire-prone area, owning a trampoline, and owning a swimming pool. Different activities in your home, such as operating your home as an Airbnb, could also play a role.

Additional home insurance coverages

Standard homeowners insurance policies cover the structure of your home, its contents, and liability. However, you may find yourself with insufficient limits or with damage that is completely excluded from your current policy. Additional policies can vary in price, but they can make a significant difference in filling any gaps in your coverage. Two distinct types stand out:

• Flood insurance: Most home insurance policies exclude flood insurance. It is covered separately by policies with the National Flood Insurance Program (NFIP) and a few private companies. While flood insurance is available to everyone, it is most common in high-risk flood zones. In 2019, the states with the most flood policies were Texas, Louisiana, Florida, and California.
• Umbrella policy: According to Harper, “[Umbrella policies] supplement your personal liability coverage and are a more cost-effective way to increase liability limits.” He suggests that if you have a high net worth, are a landlord, do a lot of community volunteering, regularly host parties or gatherings, or have an attractive nuisance, you should think about getting an umbrella policy.

You might want to add some more options. You could talk to your insurance company and agent about adding optional coverages and policies to your insurance package.