3 Factors That Affect the Cost of Home Insurance

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  • Home insurance is a crucial form of asset protection.
  • Homeowners must cover the costs of homeowners insurance premiums to get the necessary protection.
  • Many factors affect the cost of premiums including the value of the home.

Homeowners must make sure they know how premiums are calculated.

Property owners need to have home insurance. Anyone with a mortgage is going to be required to have a policy in place. But regardless of whether a lender mandates it, all homeowners should buy coverage to protect their house and personal property within it. 

Homeowners insurance comes at a cost, though. And it's important for homeowners to understand the factors that affect the price of coverage. This matters both when buying a house, as some homes are more expensive than others, as well as when you are a current property owner so you'll know what to expect when setting a budget for coverage. 

So, what are the different things that affect premium prices for homeowners insurance? Here are three big factors insurers consider when determining the cost of a policy.

1. The cost to rebuild the home

When buying home insurance, it's important to make sure the policy provides sufficient coverage to rebuild the home if it's destroyed or damaged. Homeowners should typically choose replacement value coverage, which provides funds to restore the home to its current status. This is an alternative to market value coverage, which pays just what the house is worth at the time -- which isn't always enough to rebuild.

The more expensive it would be to rebuild a home, the more insurers will charge for coverage. That's because if something goes wrong with a costly home, the insurer faces a bigger risk of having to pay out a large sum. 

2. The types of coverage purchased

The kinds of insurance a homeowner chooses will also affect the cost of an insurance policy. 

As mentioned above, replacement value coverage can provide more certainty that the house can be rebuilt compared with market value coverage -- but replacement value coverage is more expensive.  

Homeowners can also opt for additional protection beyond just insurance to rebuild the house. For example, most people buy protection for their personal property. And most people buy liability coverage to protect them in case someone gets hurt on their property and they're held responsible for the resulting damages.  

Buying a substantial amount of personal property and liability protection can add to premium costs, but is an important way to protect assets since most people can't pay to replace all they own after a disaster or cover injury costs out of pocket. 

3. The risk of claims being made

Finally, the risk of an insurance claim also affects premiums. If an insurer believes it is more likely to have to pay out a claim, then the insurer will charge more for coverage. 

An insurer may believe there is a higher risk of a claim being made if the home is in an area prone to covered disasters, such as an area with lots of tornadoes. Or if there is a swimming pool or a dangerous dog on the property, then the insurer will charge more because of the chances of someone drowning or being injured by the dog and the insurer having to pay out.

Homeowners should be aware of each of these factors so they'll know how much they can expect to pay based on the value of their home, where it's located, and the risks it presents. 

Our picks for best homeowners insurance companies

There are many homeowners insurance companies to choose from. We’ve researched dozens of options and short-listed our favorites here. Looking for a green build discount or easy bundle policies? Want an easy-to-use interface? Read our free expert review and get a quote today.

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