How is Home Insurance Calculated?
There may be (literally) hundreds of rating factors that go into a home insurance premium and some insurers weigh various factors differently, which is part of the reason prices can have a wide variance from one insurer to the next. However, a few factors tend to influence price more than others.
Home insurance also has several parts, including liability insurance and medical payments to others. These add to the premium as well, but we’ll focus on the house itself.
First, it’s important to understand that the insured value of your home isn’t based on the market value of your home or how much you paid when you purchased your home. Real estate markets go up and down and sideways and may be affected by several factors outside of your control, like local economic factors.
Instead, home insurers are insuring your home for the cost of rebuilding your home with “like kind and quality” materials, which means your insurer is trying to provide enough coverage to make your home as good as new if it’s damaged in a covered claim.
Insurers use software to help calculate the cost of rebuilding your home as accurately as possible, accounting for the size, type of construction, materials, and special features. Some building types may cost more to build, like masonry, but may also reduce your premium in other areas due to safety features, like fire resistance.
Let’s say that the insured value for your home is $300,000. You’ll also have other structures on your property that you’ll want to be covered as well, like sheds, gazebos, fences, or detached garages. Often, these other structures are covered for 20% of the home’s insured value, or $60,000 in this example.
Now you’ll also want to insure the home’s contents. Your furniture, clothing, household items, electronics, appliances, and valuables aren’t part of your home — even if they make a house feel like a home. These are insured separately on your home insurance policy. Often, the standard coverage amount is about 50% of the insured value of your home, or another $150,000 in this example.
Your $300,000 home has become a $510,000 home, with all three areas of coverage subject to a similar set of risks.
In most cases, you also have the option to change the coverage amounts for other structures or your belongings if the amount of coverage is insufficient or if you want to specifically insure certain items.
If you have questions about your home’s coverage or want to review your policy, just reach out to your broker. We’re here to help.