June 21, 2024
What are homeowners insurance premiums and how do they work?

When you shop for homeowners insurance, you’ll usually provide basic information to a homeowners insurance company about your property, the types of coverage you need and how much coverage you need. For instance, you might specify whether you need coverage for a pool or expensive personal property. You’ll need to provide your address, since location greatly affects how much you pay for insurance. Depending on the insurance provider, you might have to answer specific questions about the home’s structure, such as the age and condition of your roof.


In return, the company will generate a homeowners insurance quote. The quote typically details what coverage your potential policy would provide and at what coverage limits. The quote should also show how much you would be expected to pay in order to keep the policy active. This is your premium. Keep in mind that premiums can vary between insurance companies, so it’s usually a good idea to shop around for insurance before purchasing a policy. Additionally, your quoted premium could change as the insurance provider finalizes your policy and verifies information.


Factors considered in your homeowners insurance premium

Below are common factors that impact homeowners insurance premiums. However, speak with your property insurer or insurance agent about your specific rating factors.


Coverage types and amounts

A main factor used to determine your homeowners insurance premium is the amount of coverage you need. Most property insurers have a valuation tool used to determine your home’s estimated rebuild cost if it were considered a total loss due to a covered peril. This coverage will appear as dwelling coverage, otherwise known as Coverage A, on your declarations page.


Many of the recommended limits for the remaining coverage types are typically calculated as a percentage of the dwelling coverage, which varies by carrier. These coverage types can often be increased independently if more coverage is needed. For example, if your policy only includes $25,000 for other structures coverage, but you have a $45,000 detached garage that you need to insure, you may be able to increase the other structures coverage in your policy.



Where your home is located is another important factor used to calculate your homeowners insurance premium. Insurance companies gather data about the ZIP code where the home is located, including the risk of crime, weather events and natural disasters. The more likely it is for you to file a claim in that ZIP code, the higher the premium could be.


How close you are to the nearest fire hydrant and fire station matters as well. The closer you are, the more you can save on your homeowners insurance premium. Generally, the lower your protection class, the more favorable your premium and the more property insurers are willing to offer coverage in the area.


Being closer to coastal waters can increase your home insurance premium. The closer you are, the more likely your home is to experience damage from a hurricane or flood. If you are in a high-risk flood zone, you may be required by your insurer to buy flood insurance, which is not covered by standard home insurance and is offered as a separate policy.


Structural elements of your home

Your home’s characteristics are used to determine how much dwelling coverage is needed. There are several factors considered that make up the build of your home, including:



Construction type

Square footage

Condition of the home

Quality of the construction material used

Any improvements or enhancements (like upgraded kitchens or bathrooms)

Number of bathrooms

Foundation type

Installing safety features like storm-proof windows and doors, wind-rated garage doors, home security systems, automatic sprinklers and an impact-resistant roof may lower your homeowners insurance premium.


Insurance score

An insurance score is not the same as your credit score, but takes your credit history into consideration—and it can affect your homeowners insurance premium in most states. Insurance companies base premiums on risk and actuarial studies have shown that people with a lower credit-based insurance score tend to file more claims with higher payouts, according to the Insurance Information Institute (Triple-I).


Though insurance score modeling is proprietary to home insurers generally, paying your bills on time and avoiding collections and bankruptcies will help increase your insurance score and lower your homeowners premium.

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