Homeowner’s Insurance Premium

Are you a new home buyer wondering how much your homeowners insurance premium will cost you? Or perhaps, you already have homeowners insurance but want to learn how to calculate your homeowner’s premium when trying to obtain a better deal. Either way, you are in the right place, as we will provide you with a comprehensive insight into what a homeowners insurance premium is and how you can calculate it yourself. 

What Is a Homeowners Premium

A homeowner’s insurance premium is the amount of money you are responsible for paying to your insurance company on a monthly basis. This is a payment installment plan for your homeowner’s insurance policy. While most people opt to pay their homeowner’s premium via monthly payments, you can also choose to pay it all in one go. 

Usually, you will pay a lump sum amount of your annual premium at the time of purchasing your homeowner’s insurance policy. In some cases, if your mortgage provider includes homeowners insurance as a component of your mortgage, you would pay your homeowner’s premium with your mortgage payments every month.

Whenever you purchase a homeowners insurance policy, the insurance provider looks at various factors to estimate how much your monthly premium will be . Some of these personal factors include your age, location, size of the property,  marital status, credit score, etc. 

However, you should note that some homeowners or homes are considered “riskier” than others; therefore, this can affect their homeowner’s premiums. 

For example, those purchasing a brand new home, are considered less of a risk to insure by insurers. On the other hand, those purchasing homes in flood zones or earthquake belts, will be deemed the opposite. The homes would be considered high-risk properties, and as a result you might have to pay a higher premium risk. 

Calculating Your Homeowners Premium

Most homeowners wonder how insurance providers actually determine their homeowner’s insurance premiums. They may ask questions like what factors were used to determine my rates? 

The first thing you must remember is that insurance companies are also a business. Therefore, they have to draw a fine line between offering you a competitive price and not losing money while doing so. 

Price is too low, and they will start paying out of their own pocket when you make a claim. Similarly, asking for high premiums will make them lose their customers to other competitors in the market. 

This is the most common reason why insurance companies analyze their losses scrupulously. They usually hire rating bureaus to analyze their previous business data. This allows the insurance provider to determine which homeowners and property characteristics are most likely as well as less likely to result in insurance companies having to pay the claims. 

That said, there is no universal formula or calculator that you can use to calculate homeowner’s premium. However, certain factors can help you save a considerable amount on your next homeowner’s insurance coverage. 

How to Calculate Homeowners Insurance Premium

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A homeowner’s premium calculation mainly focuses on the location of your home and its level of exposure to risk. Here are the steps that help insurance companies to calculate your homeowner’s premium. 

The Categorization Process

The insurer first divides the loss associated with the homeowners’ category you fall into. They will then determine the losses they typically have to face for your category.

For example, if in the previous year, the total losses of properties valued at $100,000 were $5,000, then the outcome would be 5%, i.e., five cents per dollar of your property value to cover the losses. This amount is also known as pure premium. 

Determining Your Expense Ratio

Once the insurance company knows the risk of loss, then will calculate their administrative costs and other expenses such as taxes and commissions. Moreover, they also estimate how much profit they will be out of your homeowner’s insurance coverage. This is known as the expense ratio expressed in percentage. 

Time to Set Your Monthly Premium

The homeowner’s premium will be the price that you pay every month. This requires the division of your pure premium by one and subtracting the expenses ratio from it. The remainder will generate your gross premium that you will be liable to pay as a homeowner. 

For example, if the insurance company’s expense ratio is 27.1 percent and your pure premium is 5 cents on each dollar of your property. 

In this case, they are going to divide five cents by one and minus .276, and the answer would be 69 cents for each insured dollar for your property. Therefore, your premium would cost you $690 per year. 

Factors that Determine Your Homeowners Premium

Here is a comprehensive list of factors that a homeowners insurance company will consider when calculating your homeowners’ insurance premium. However, you must note that these factors are ever-changing and a highly guarded secret of the industry. 

  • The higher the replacement cost of your home, the higher your homeowner’s insurance premium will be. 
  • The square footage of your property meaning the larger your home, the more it will cost to rebuild. This will automatically increase your homeowner’s premium. 
  • How old is the property you are buying homeowners insurance for? The older the property, the higher the homeowner’s premium. 
  • What are the construction type and materials used on your property? For example, if the construction material is fire-safe material such as masonry, it has a lower risk of catching fire than wood. 
  • How many people will be staying in the house? The more the people, the higher is the liability, i.e., chances of any accidents due to human error.
  • What is your roof type? i.e., the wood shakes that are more prone to fire or are the fire-retardant material such as asphalt or metal.
  • The history of claims in the area of residence. 
  • Your personal history claims. The more claims you have made, the higher your premium rates will be. 
  • Even pets such as dogs with biting history or breed can be a factor to increase your homeowner’s insurance premium. This is because the company might be liable to pay medical bills if a guest sustains an injury while they are on your property. 
  • Your personal credit scores. The higher the scores, the better chances you have to secure a favorable homeowners premium. According to Insurance Information Institute research, people with lower credit scores are more likely to file for homeowners insurance claims than others. 
  • The crime rate in your locale also determines how much the insurance company will charge you for the homeowner’s insurance premium. The higher the crime, the more you will end up paying. 
  • Are there any attractive nuisances? These include ponds, playground equipment, trampolines, and swimming pools. All these can increase the potential of liabilities and accidents and increase your premium prices. 

What May Increase Your Homeowners Premium

Each homeowner’s insurance provider uses their own calculation model to determine how much they are going to charge you for the homeowner’s premium. However, they do so by determining several factors, and these factors are responsible for the increase or decrease of your premium amount. 

Mostly, these factors include the following:

  • Condition of your home
  • The exposure to risk
  • Your previous history with making home insurance claims 
  • Personal credit history
  • Insurance company’s previous data on how much they might lose or profit from offering you insurance coverage. 

However, it is not that simple, and sometimes the premiums can be predictably high or low. This is mostly because of the competition in the market, where insurance companies are trying to take the business away from their competitors. 

Insurance companies do tend to change their insurance premiums to attract more customers from different locations and backgrounds. Plus, their requirements and priorities change with the trend in the market. 

For example, one day, they will prefer to offer favorable premium rates to first-time buyers, and another week they will be offering better rates to middle-aged couples. The same is the case with locations and other factors. The idea is to keep a balanced risk pool. 

Can You Lower Your Homeowners Premium?

Do you wish to lower your homeowners’ insurance premiums? Well, it is certainly possible to do so, and for that, you need to know the factors that control if your premiums will be high or low. Certain factors are out of your control, such as how many people filed a claim under your category.

On the other hand, there are factors that you can consider when buying a home.

These include factors such as:

  • Is it a safe area with lower reports of theft, vandalism, and burglaries?
  • Is the house prone to destructive storms, floods, or other natural disasters?

That said, there are various ways you can save money on homeowner’s premium.  Let us look at them one by one. 

5 Steps to Lower Your Homeowners Insurance Premium

Here are five ways for you to ensure that you secure lower premiums for your homeowner’s insurance. 

Increase Your Deductibles

You can always ask the insurance company to raise your deductible. This is the amount you have to pay every time you wish to make a claim against your homeowners’ insurance. Raising your deductible when you need insurance coverage to take care of the damage will allow you to secure lower premium rates. 

However, you should only raise your deductible to an amount that you could easily pay if needed.  

Buying Multiple Policies for a Single Insurer

You can always get a more favorable homeowner insurance premium if you buy multiple policies from a single insurance company.  This is known as bundling, and you can get all your insurance policies, such as homeowners insurance, life insurance, auto insurance, etc., from one insurance company. 

Installation of a Security System

You can consider installing a home security system to monitor your premises. This will help you reduce the risk factor of theft and burglaries at your home, and insurance companies may offer you better homeowner’s premiums. 

Studies show that you can lower your insurance premiums by 20 percent by installing a security system on your premise. To that point, you can also install other security features such as upgraded locks, doors, and windows with motion sensors to help reduce your premium. 

Only Consider Your Home’s Structural Value

Most people make the mistake of adding their property’s land value into the total value of their homeowners insurance, which is unnecessary. Think about it; if your house burns down or destroyed in a hurricane, you will only be rebuilding your home – there is barely any damage to the land itself

Therefore, you can minus the land cost and only ensure the value of your home’s infrastructure. This will make a considerable difference to the overall value that you want the insurance company to insure. Result? You will be able to secure better and better rates for your homeowner’s insurance. 

Requesting C.L.U.E Report

C.L.U.E stands for Comprehensive Loss Underwriting Exchange. You can request a C.L.U.E report when buying a new property in order to find out any claims made by the previous owners of the property. This is because the claim history of the previous owner may also affect your homeowner’s premiums. 

Having the report corrected can save you money on your insurance premium. Moreover, you can also request your personal C.L.U.E report to know your claim history. Review it to fix any errors and improve your chances for better homeowner’s insurance premiums. 

The Takeaways

Now you know how to calculate your homeowner’s premiums and what factors make the difference when trying to secure better rates. However, you must remember that each homeowner insurance company has a different gauging criterion and may consider only some or all of these factors. 

One of the best ways to increase your chances for securing the best homeowners insurance premiums is to get many quotes from multiple insurance providers. While one may charge you a higher premium, another may offer you the premium rates within your budget range. 

Knowing all these industry secrets can put you in a better position when bargaining with the insurance companies. You can make a strong case for why your insurance premiums should be lower, let the insurer may then quote you a price that you actually deserve to pay. 

In case you are still not sure about how you can calculate your homeowners premium. If you are paying higher than you should, then you can seek professional assistance. Several insurance premium agents can help you gauge your current circumstances and secure better homeowners insurance premium rates.