What Determines the Price of Homeowners Insurance?
Owning a home was part of the original “American dream.” But fast forward to today and that dream seems more unrealistic than ever. Housing supply and demand are in decline. As a result, larger down payments required by banks and rising mortgage interest rates hold the goal of homeownership just out of reach for many Americans. If you’re struggling to meet the costs of owning a home, finding an affordable insurance policy may seem daunting. So we did the research for you. Read on to learn what affects the price of homeowners insurance and how you can save.
1. CLAIM HISTORY
Insurance companies predict the likelihood that you’ll file a claim in the future based on claims you’ve filed in the past. They zero in on stats such as the frequency and severity of past claims, and if you filed more than one claim on the same issue. You may not qualify for coverage at all if you’ve had multiple claims in the past three to seven years–even if they were filed by the previous homeowner.
On average, filing just one claim can raise rates up to 9%, though in some states that increase is even steeper. Thankfully, there’s good news: being claim-free for a set period of time can earn you discounts, usually capped at 25%.
How to save: Before buying a house, do some digging. Review claims made by the previous homeowner, all of which are stored in a mass, interconnected database called
Comprehensive Loss Underwriting Exchange (CLUE). A CLUE report includes information about every claim filed on a property for up to 7 years, such as the date and type of loss, the insurance company that handled the claim, and the amount paid by that company. In order to review the property’s CLUE report, you or your real estate agent must ask the previous homeowner to obtain a copy for you. (They can do so for free through LexisNexis, the consumer-reporting agency that generates CLUE reports.) If you decide to close the deal, search for homeowners insurance as soon as you sign the contract so you have time to find an affordable policy with the right amount of protection.
Pick your battles–don’t report minor claims. If damages are less than or slightly above your deductible, consider paying for the fixes out-of-pocket.
2. CREDIT SCORE
This continues to be one of the most important factors for the pricing of any insurance. Studies have revealed a strong correlation between credit score and the likelihood of filing future claims–the lower the score, the higher the risk of claims, and the pricier that premiums will be. Though a homeowner cannot be refused coverage based on a low credit score, they often earn discounts if it’s high enough.
How to save: Remember: higher credit score = lower insurance premium.
3. AMOUNT OF COVERAGE
For starters, we recommend up to $1 million on liability coverage and $10k on medical expenses in the event of an accident on your property. How much coverage you need also depends on the value of your personal property (jewelry, wine, art, etc.) and additional structures such as storage sheds, pools, and trampolines. Although it’s fun to splash and bounce in the summer sun, owning a swimming pool or a trampoline can increase insurance costs by 10% or more.
How to save: Weigh the costs of choosing additional outdoor structures and periodically assess the value of all your personal property.
Higher deductibles mean you’re less likely to file a claim and will pay for smaller repairs yourself. Insurance companies then view you as a responsible homeowner, so they’ll be more willing to cover you when you need it most.
How to save: Increase your deductibles, especially if you have a history of zero claims. Instead of spending the money that you'll save with higher deductibles, you could set aside at least a portion of it in an emergency fund. Doing so helps ease the financial burden when unexpected damages arise.
5. CONSTRUCTION & CONDITION OF HOME
Older homes that are not well-maintained have higher premiums. Wood-framed structures cost more to insure because of flammability and rotting as compared with cement- or steel-framed structures. That being said, simple updates–like installing smoke alarms–can save 10% or more annually. Every little bit helps!
Other safety measures can lower monthly bills. Usually, a discount is offered for installing home security devices such as alarm systems, deadbolts, and overhead sprinklers. Having a burglar alarm monitored by the local police station can lower premiums by 5% or more if the homeowner can provide proof with a bill or contract.
How to save: Keep up with home maintenance and preventive measures to reduce risk of claims. Install security systems and smoke alarms for discounts.
Living in a disaster-prone area means higher premiums. But accessibility to resources and labor–such as proximity to fire hydrants or a firehouse–can soften the blow. The crime rate and population density of your neighborhood also impact the likelihood of claims due to vandalism or burglary. These factors can impact your insurance costs.
How to save: If you’re planning to move, first talk with your agent about what factors influence homeowners insurance premiums in that area.
7. ACTUAL CASH VALUE VS. REPLACEMENT COST
In the event of your home or personal property being damaged or destroyed, which coverage option you choose affects the price of your premium. Actual cash value (ACV) strictly covers the current market value of your property, or the amount you could expect to sell it for at the time of damage or loss. This is calculated by subtracting the loss of value (depreciation) since purchase from the original purchase value. ACV is normally the cheaper coverage option.
Replacement cost (RC) coverage, on the other hand, reimburses you for the cost of repairing or replacing your property using materials of similar kind and quality. Depreciation is not a factor. RC is the default coverage for most standard homeowners policies. It takes into account the value of your home and possessions, the accessibility of your property, and the costs of construction, debris removal, and labor. Since RC offers fuller coverage than ACV, it will increase your premium.
How to save: Determine the value of your home and personal property. Talk with your agent about whether ACV or RC coverage suits you best.
8. BUNDLING POLICIES
Bundling home and auto insurance policies with the same company will afford you some discounts, ranging from 5% to 25% per policy. Discounts on homeowners insurance tend to be greater since homes are worth more than cars. That is especially true if your auto policy affordably covers the basics, thanks to a good driving record and high credit score. But here’s a word of caution: bundling discounts do not always pan out to be less expensive than policies with separate companies.
How to save: Talk with your independent agent about home and auto insurance bundles. And don't worry, that same agent will be there to translate terms and explain exceptions.
The Bottom Line
Owning and taking care of your home can, at times, feel like a job you aren’t getting paid to do. But we know that it’s well worth the investment. That’s why you’ve got to snatch up every opportunity to save on protecting your home and valuables. Want to qualify for discounted premiums on homeowners insurance? Here’s your cheat sheet:
File claims sparingly
Maintain a high credit score
Install security systems and smoke alarms
Bundle your home and auto policies with the same company
Where you live, the amount of coverage you need, your deductibles, and your replacement cost also have a bearing on how much you pay for your policy. Want to cash in on discounts and savings opportunities but don’t know how? Give us a call or let us send you a quote.