Chapter 6 How Is My Home Insurance Premium Determined By the Provider?

Understanding the variables that can affect homeowner’s insurance premiums can save consumers a significant amount of money. These factors range from the location of your dwelling to its distance from a fire hydrant. Even factors that consumers may not realize, such as whether they are smokers, can affect their premium. Essentially, insurers consider both the individual seeking insurance and the property they seek to insure.

“You’re a Statistic”

Insurance companies view consumers as a set of risks based on various factors. They enter these variables into an algorithm that calculates your insurance score, which in turn determines your premium. Your insurer might consider facets such as your occupation, sex, age, and marital status to determine your insurance score. Your claims history, as well as your credit history, will also be considered by your insurer.

Other factors that may be considered include your lifestyle and your belongings. Note that your insurance score is not the same as your credit score. While your credit history is a factor that helps determine your insurance score, these two scores are completely different.

Home Value

Along with its location, the age and condition of your home can also affect its value. For instance, some areas are prone to certain natural disasters, such as hail storms, earthquakes, and hurricanes. Homeowners in high-risk areas will have higher insurance premiums. The proximity of your home to a fire hydrant or a fire station can also affect your insurance rate. More specifically, facets of your home that can impact its value include:

  • The square footage of your home.
  • Building costs in your area.
  • The type of construction and building materials used. For instance, wood frame homes may cost more to insure than brick homes because the former are more susceptible to fire damage.
  • Crime rates in your neighborhood.
  • The condition of plumbing, heating, and electrical systems.

Homeowners should also note that a home’s replacement cost may widely differ from its market value. Your home may be insured on a replacement cost basis, which is the amount needed to repair your home and replace your belongings with new items of “like kind and quality,” without deducting for depreciation.

Many consumers incorrectly assume that their home’s tax value, appraisal, or the amount they purchased the home for dictates the amount of insurance they should obtain. In fact, these values differ because they represent a home’s worth, or market value. They do not represent how much it would cost to rebuild the home. Furthermore, the land on which a home is built is included in its tax value and its selling price, but this land is not insured by homeowner’s policies.

Each Insurer is Different

Before you settle on an insurance policy, you’ll want to do some comparison shopping. Make sure you compare quotes because not all insurers are the same, and their quotes may differ drastically. The Insurance Information Institute (III) recommends that consumers obtain at least three quotes before they make a final decision. However, price is not the only thing that consumers should consider. Take into account the company’s legitimacy and customer service. In a dire situation, you will want a company that thoroughly answers your questions and handles claims fairly and efficiently. Ask friends and family members for their recommendations.

Consumers can do their homework by checking the financial health of insurance companies by using ratings provided by independent rating agencies. These ratings will provide information on the financial health of the insurance companies you are considering. Independent rating agencies include A.M. Best and Standard & Poor’s. Consumer magazines, as well as state insurance departments, may also provide their own ratings.


Most insurers offer discounts to lower your home insurance premium, so ask your insurer whether you are eligible for any discounts. Most companies that sell homeowner’s insurance also sell other forms of insurance, such as auto, life, or umbrella liability policies. These insurers may offer multi-policy discounts for consumers who have multiple policies with the same company. In some cases, this discount may reduce your premium by 5% to 15% every year. However, make sure that buying multiple policies from the same company is cheaper than buying individual policies from different companies.

Agencies may also offer discounts to consumers who have held a policy with the same company for several years. As a long-term policy holder, you may receive a 5% discount for staying with a company for three to five years, or a 10% discount if you stay with them for six years or more.

New homes may qualify for discounts, and homeowners who renovate older homes may seek similar discounts. A modernized plumbing or electrical system, for instance, may decrease your premium. Installing safety devices such as dead-bolt locks and burglar alarms for security and sprinkler systems and smoke detectors for fire prevention can also lower your premium by approximately 5%. Some companies may offer even more significant discounts — as much as 15 or 20% — if you install a sophisticated sprinkler system and a fire or burglar system that notifies the local police or fire station. However, these systems can be pricey. Before you take the steps to install one, ask your insurer for recommendations and do the math. Determine whether the cost of the system will translate to future savings.

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