The Detroit Post
Sunday, 28 November, 2021

How Are Home Insurance Rates Determined

James Lee
• Sunday, 11 October, 2020
• 9 min read

He started Toyboys, LLC in 2013 as a music production and education service company. Human earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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He is a CERTIFIED FINANCIAL Planners, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP of a national insurance agency, Real Time Health Quotes.

Editorial Guidelines : We are a free online resource for anyone interested in learning more about life insurance. We update our site regularly, and all content is reviewed by life insurance experts.

Personal information aside, the home itself (like the car) determines most of what you will pay in the way of an insurance premium. At the end of the day, the insurance company’s aim is to offer the lowest premium possible, to stay competitive in the marketplace, charge enough money to pay all the claims and operations expenses, and still have profit left over.

These odds are calculated using prior loss data comparable to your characteristics, focusing on claim frequency (how often a claim is subject to occur) and severity (how much the insurance company ultimately pays for the loss). The insurance industry uses a simple acronym that can be used to describe the basic rating factors for a home (or building).

If you have purchased a homeowner’s insurance policy, you likely remember answering over a dozen very specific questions that apply to each factor. This describes the materials used to construct your home, including framing, support and interior finishing.

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Also, central heating and cooling systems are usually rated lower than individual units. However, an identically built “second home may cost quite a bit more to insure from a property standpoint, as there may not be someone there to look after it.

A second home, not occupied year round, might be a better target for vandals and thieves, which would result in more claims and a higher premium). Basically, there are discounts built into homeowner insurance policy programs for various protection devices and services.

When it comes to public fire protection services, there is really only one comprehensive source the insurance companies use. The Insurance Services Organization, known as ISO, developed a rating system for “protection class” graded from 1-10.

An example of an undesirable exposure for a home may be its proximity to a coastline in an area subject to hurricanes. Property on the Florida coast and on the entire Gulf of Mexico is substantially more costly to insure than homes further inland.

The “tiers” are measured in distance from a coastline, with the cost and acceptability ranging vastly from one to the next. Exposure is also more acquainted with commercial buildings with regard to premium costs, but worth a brief discussion.

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An example would be a commercial building (or home) located next to a fireworks' factory in a city. Basically, there is a premium amount paid for the dwelling, other structures, your contents, liability, medical payments, and loss of use.

The cost of your insurance policy depends not only on the coverage you select, but also on a number of other factors, some of which may surprise you. Most Washington area homeowners can save more than $500 a year by switching from their current insurance company to a lower-priced one.

To determine replacement cost, most insurance companies rely on estimates obtained from valuation databases and appraisals when you take out your policy. On the other hand, if you over insure you’ll pay for coverage you don’t need and could never make claims on.

Some estimates conclude that over half of U.S. homes are under insured, by an average of more than 20 percent. You can buy optional policies to protect against being under insured, including a guaranteed replacement cost provision, extended dwelling coverage, or an inflation-guard endorsement.

Some insurers offer steep discounts to customers who have not made any claims during a two-to-five-year period. Insurance companies divide areas into territories and assign rates based on the losses companies experience in each one and factors like the quality of police and fire departments, crime statistics, and general level of maintenance of the housing stock.

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The masonry construction category includes houses with exterior walls made of a noncombustible material like brick, stone, or adobe but that have floors or roofs made of combustible materials. At a location with poor fire protection, construction materials matter more because frame houses are more likely to totally burn.

In such a location, total premiums are about 20 percent higher for a frame house than for a masonry one. When you take a high deductible, you’re also less likely to file small claims that spur future premium hikes.

Determine how big a loss you can incur without unacceptably disrupting your life, and then set your insurance deductible levels accordingly. You’ll pay much higher premiums on places in historic districts, where bylaws usually require exterior damage to be repaired to replicate the original appearance.

A fireplace or wood-burning stove; A pool, tennis court, trampoline, or outdoor hot tub; A fully or partially finished basement; A garage located beneath a living area; An electrical system not updated with a circuit breaker; A roof composed of wood shingles; A roof over 20 years old; or A furnace more than 20 years old. Most insurers charge higher premiums to homeowners who own a rottweiler, pit bull, or other dog breed that the company believes has a propensity to attack strangers.

Most insurers charge higher premiums to homeowners whose dogs have bitten strangers. Some insurers specifically exclude damages caused by dog bites from their liability coverage.

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Since smoking increases fire risk, most insurers charge slightly higher premiums for households with one or more smokers. Keeping your insurance needs in mind as you shop for a home is a smarter strategy and can also be a useful filter for you.

If you fall in love with a home but realize it’s on a flood plain, remember the potential increases to your homeowners insurance premiums, and how that will affect the overall costs. A house in a densely populated area likely will cost more to insure; just think about how much greater the risk of fire damage is when homes are built extremely close to one another.

Another thing to consider when you’re looking at houses is how far they are from fire hydrants and departments because it can make a big difference on your home insurance premiums. The location of the home also helps determine the potential risk from severe weather like tornadoes and hurricanes.

However, you’ll need separate policies for floods, earthquakes and mudslides, as these aren’t typically covered by standard homeowner insurance. Starting at the top, the age and type of your roof gives an insurance provider insight into your potential risk.

Similarly, providers will look at your home ’s electrical system; circuit breakers are likely to cost you less than fuse boxes. Dwelling coverage is the part of home insurance that pays to rebuild your house if it’s damaged or destroyed by a covered peril such as fire or wind.

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That’s basically determined by multiplying the square footage of your home by local construction costs (there’s that location factor, again). Swimming pools, trampolines, and certain dog breeds can also result in increases to your premium.

Insurance companies use your credit score to evaluate the risk you pose of filing claims. There also are ways to cut how much you’ll pay for coverage and some can factor into your home search.

When you accept greater responsibility by increasing your deductible, your carrier lowers the premium you pay each month. However, make sure you keep enough money on hand to meet this higher deductible should you need to file a claim.

That’s why you should make sure you get all the mileage you can out of your home buying budget, including how much you’ll pay for home insurance. The blog serves as a resource center for insurance consumers and homebuyers across the country.

For insurance companies, there's a fine line between pricing competitively and losing money. Price too low, and unexpected losses may leave them unable to pay claims -- and put them out of business.

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For this reason, insurers continuously analyze their loss data (or pay companies called rating bureaus to collect and analyze data for them), determining which homeowner characteristics are most likely to result in claims, so they can price their products correctly. There isn’t an official home insurance calculator you can access, but there are a few factors you should know about which can help you save on your homeowners insurance coverage.

A home insurance calculator typically categorizes policyholders by area and risk exposure. Next, the insurer determines its administrative and other costs, like commissions and taxes, and builds in its desired profit.

Furthermore, insurance pricing is very fluid and changes continuously, making it difficult to figure out what determines home insurance cost. Seltzer adds, “We did business with a carrier that had a guy in a windowless cubicle in Titanium.

Knowing what determines home insurance cost can change from one day to another, depending on how many people filed a claim recently, or if there’s been a fire, an increase in burglaries or a destructive storm or other natural disaster recently hit the area. You won't want to make multiple small claims anyway, so paying for coverage you're unlikely to use isn't always the best use for your insurance dollars.

It's relatively cheap (usually between $200 and $300 per year), and Seltzer says that some insurers' software is designed to offer lower rates to those with this coverage. Similar to the “black boxes” some drivers install on their cars in exchange for lower car insurance premiums, “smart” home products including security cameras, thermostats, carbon monoxide and fire detectors, can net you 5 to 20 percent off some or all of your homeowners insurance premium.

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Replacement cost of the home (higher cost = higher rates) Age of the home (newer homes can be cheaper to insure) Home square footage (larger homes are more expensive to rebuild and have higher premiums) Number of primary inhabitants (larger households increase potential liability) Construction type (fire-safe materials like masonry are cheaper to insure than wood) Roof type (fire-retardant asphalt or metal is preferable to wood shakes) PPC (Public Protection Classification, which measures proximity of fire station, police, hydrants, etc. Report of the property, which lists claims filed by the previous owners in addition to you.

Security or alarm system (alarms and monitoring help decrease rates) Fire alarm system Deadbolt locks Neighborhood crime rate (higher crime areas cause higher insurance rates) Attractive nuisances (swimming pools, ponds, machinery, playground equipment, trampolines) increase liability potential and insurance premiums If one or more of the factors listed here is costing you money and can't be changed (like your location), check with other insurers.

However, homeowners insurance costs vary widely among providers, and one of the best things you can do is to get multiple quotes from competing companies. If, by chance, the customer falls into the demographic that the computer wants, the insurer may offer a lower price.

I know one fellow who was offered a lower quote three times until he bought. Insurers use different methods to set prices so it's important to shop around when looking for home insurance.

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