How Home Insurance Premiums are Calculated
all insurance premiums, how much you pay for home insurance depends on
a number of factors related to risk. Insurers analyze these risks, and
figure out how likely it is that you – or a group of people with
the same set of circumstances – will make a claim, and how much that
claim will cost.
These factors typically affect what you pay for home insurance:
- Where you live: Insurers keep records
about such things as the number, type and cost of claims by neighbourhood.
They can tell from past experience what the circumstances are in your
neighbourhood, and how likely it is that you will have to make a claim.
For example, if you live in an area where most people commute to work
and homes are left unoccupied during the day, the statistics may show
your neighbourhood has more break-ins. The cost of home insurance, therefore,
varies from neighbourhood to neighbourhood, from city to countryside,
and is based on knowledge and experience.
- Proximity to water: Insurers are
concerned about fire, and will look at how far your home is from a source
of water (e.g., fire hydrant, fire station) If you live in an urban
area, this is generally not a problem. If you live in the country and
the distance is great, however, this will influence the cost of your
home insurance. The sooner a fire can be put out, the lower the cost
of restoring your home.
- Replacement cost: The factor that
will make the biggest difference in the cost of your home insurance
is simply the size and composition of your house – as well as
your contents. The larger the house and the more contents you have,
the more it will cost to replace. In addition to the square footage,
insurers will take into account such things as the quality of construction
used to build your original house, as that can vary greatly from home
- Heating: Because oil tanks have the
potential for causing costly environmental hazards, your insurance representative
will ask you lots of questions about the age and condition of your tank.
There is far less risk with forced-air gas furnaces or electric heat,
so you may pay more for your home insurance if your home is heated by
- Electricity: There are several factors
concerning electricity. Do you have breakers or fuses? What is the flow
of electricity coming into your house, i.e., the "amp"? And
what kind of wiring do you have? Insurers know from experience that
breakers pose less risk than fuses, and that a minimum of 100-amp service
is better than a lower level of service, as a lower amp can lead to
overloading and fire. They also know that some older types of wiring,
such as knob-and-tube or aluminum, can increase the chance of fire,
especially if the wiring has deteriorated or been damaged during renovations.
Some insurance companies may ask for a guarantee that a home does not
have this kind of wiring; some may give you time to have it removed;
while others may ask to inspect the condition of the wiring to ensure
- Pipes: Galvanized or lead piping
usually means that the plumbing is older, and older plumbing is more
likely to crack, leak or run into other problems. Insurance companies
generally prefer homes where the plumbing has been upgraded to copper
- Wood stoves: These are a common source
of house fires and carbon-monoxide poisoning, particularly if they are
not properly installed and maintained. Insurance companies may want
to inspect such installations. Consult your insurance representative
before buying or renting a home with a wood-burning stove, or before
- Age of roof: Insurers generally prefer
it if your roof has been updated within the last 20 years. Some policies
will pay only depreciated values, as low as 25% of the replacement cost,
for damaged roofs that are near the end of their designated service
- Other uses of your home: Insurers
will want to know if you have built or are planning to build a rental
apartment into your home; begin operating a business there; or make
any other significant alterations to the structure or the way your home
- Other factors: Insurers will ask
if you have a security alarm and a fire alarm, and whether they are
monitored by an outside service. They will also want to know if you
have a swimming pool and other structures on your property, such as
pool houses or storage sheds, that are worth more than 10% of the insured
value of your home.
- Basic or full coverage: Once all of the above is taken into consideration, you get to choose
the types of coverage you’d like – which will also influence
the cost you pay. While there are government regulations dictating how
much insurance drivers must have, there are no such laws when it comes
to home insurance. The only requirement may be one set by your bank or
mortgage holder. From there, it’s up to you to decide whether you
prefer basic or more comprehensive coverage. And this is something your
independent insurance representative can help you with.
These factors typically DO NOT affect what you pay for home insurance:
- Gas vs. electric appliances: The types of appliances in your home do not affect the cost of your home insurance.
- Brick exterior vs. aluminum siding: Most insurance companies do not use type of construction as a rating factor when calculating home insurance premiums. However, construction type is used when calculating the building replacement cost (i.e., what it would cost to rebuild the dwelling with materials of like kind and quality, if it were destroyed). See above for how the building replacement cost may affect your premiums.
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