Factors that affect homeowners insurance premiums

What affects homeowners insurance premiums?

Homeowners insurance premiums are primarily determined by five factors: the cost to rebuild your home, risks associated with the property and location, homeowner-specific risk factors, the amount of coverage you purchase and claims history. Replacement cost has the biggest impact because it determines how much the insurer may have to pay to rebuild your home after a loss.

While most factors are beyond your control, there are some things you can change to reduce the cost of your homeowners insurance.

1. Replacement cost of your home

Replacement cost is the amount of money required to rebuild your home from the ground up, and on your policy, it makes up the dwelling coverage amount. This is different from a home's market value. Market value includes other things, such as the land's value. Insurers calculate this using your home's square footage, construction type, custom features, and building materials.

Home insurance rates are affected most directly by the replacement cost of the home because it's often the largest coverage limit on the policy, and the one most likely to cost the insurance company in a claim.

It’s calculated based on many different factors about the home, including:

Square footage. A bigger house costs more to rebuild.
Construction type. Construction types differ in cost, and the risk in a fire is different, too, if you have a brick home vs. a wood home, for example.
Features of the home. Fireplaces, crown molding, a jetted tub – features like these can increase reconstruction costs.
Building materials. The materials used both inside and out, such as your siding and the material of your kitchen counters, affect the cost of rebuilding.
The age of your home. Newly constructed homes get an average 36% discount compared to older homes.

"It's possible that an older home may cost more to insure, as the materials [and] features in older homes can be more costly to repair and replace, things like plaster walls, ornate moldings, stained-glass windows [and] hardwood floors," Allstate spokesperson Justin Herndon says.

Janet Ruiz, a California representative for the Insurance Information Institute, says it's important that insurance buyers estimate the true cost of rebuilding their home if it should be damaged.

"Many insurance companies will have some kind of tool you can use and it will give you an approximate cost to rebuild," Ruiz says. "The second way is to check with a local contractor in your area to find out what the average building costs are. It's good to do both."

You won't be protected adequately if you don’t buy enough insurance. Adding extended replacement cost coverage can help avoid this.

"If you underinsure your place, you'll likely be in for a bad shock," warns William F. Harris, an independent insurance agent in Los Angeles. "Nobody wants that kind of surprise."

2. Risk factors in the area and on the property

Homes with a higher chance of damage or liability claims cost more to insure. Your location, weather risks, roof condition, swimming pool, fireplace, wood stove, and even certain dog breeds can increase premiums because they raise the likelihood of an insurance claim.

Every home has risk factors both inside and out, but some are more likely to have a big impact on your rates.

The location of your home: Home insurance rates vary by state, ZIP code, and whether the home is in an urban, suburban, or rural area.
Your dog: Some insurers won't cover specific dog breeds, such as pit bulls and Rottweilers, while others decide on a case-by-case basis.
Wood-burning stoves: Having one in your home significantly increases the risk of a severe fire claim.
Swimming pools: The liability risk of someone drowning means higher insurance rates, and hot tubs or ponds carry a similar impact.
Roof condition: The age and condition of your roof heavily influence your rates. New roofs typically see a reduced premium, while homes with older roofs pay more.
Proximity to a fire station: The closer you are to a fire station, the faster a fire will be extinguished, reducing the risk of a total loss.
Proximity to water: Being close to the ocean increases the risk of hurricanes and severe storms.

National Flood Insurance Program (NFIP), a federal program run by the Federal Emergency Management Agency (FEMA), provides specialized flood coverage, which matters because standard home policies exclude flood damage. Homeowners near bodies of water must purchase this separately to ensure full protection.

Insurers heavily weigh the physical risks associated with your property. Upgrading your roof and mitigating hazards like pools or wood stoves can significantly improve your risk profile and lower your premiums.

3. Risk factors specific to the homeowner

Insurance companies also consider factors about the homeowner when setting rates. Credit history, marital status, and running a home-based business can affect premiums. These factors help insurers assess the likelihood of future claims and determine the level of risk a homeowner poses.

Your credit history. In all states except California, Maryland and Massachusetts, insurance companies can use your credit history when determining home insurance rates. Insurance companies use an insurance score, which is not the same as a FICO credit score but uses some of the same information.
Your marital status. Insurance companies see married people as more stable, more responsible and less likely to file a claim. "Sure, married people tend to get (financial) breaks, with their taxes and elsewhere," Harris says. "It just happens to be the same when it comes to a homeowners policy. It's really all about the claims numbers."
A home-based business. Depending on the type of business, you may need to add an endorsement to your policy to protect business equipment as well as provide liability coverage.

4. The amount of coverage

Your chosen coverage limits and deductibles directly dictate your final home insurance cost, as higher protection levels require higher premiums. Adjusting your dwelling coverage, liability limits, personal property protection, and deductible directly affects the cost of your policy, as does adding endorsements.

There are a few main types of coverage on a home insurance policy, and changes you make to those levels will impact your premium.

Dwelling coverage. This is based on the reconstruction cost of your home, which we’ve already discussed above; it’s such an important factor that it earns its own category on this list. The higher your dwelling coverage, the more expensive your insurance will be.
Liability limits. The standard coverage is $100,000, but experts recommend increasing that to $300,000. If you have assets above $500,000, you should see whether a separate umbrella policy would make sense for you.
Personal property coverage. This is calculated as a percentage of the dwelling coverage, but you have the option to increase it. You can also choose replacement cost coverage rather than actual cash value coverage at an added cost.
Deductible. A higher deductible means lower premiums since you’ll pay more out of pocket if there’s a claim and are less likely to file smaller claims.
Add-on coverages. Home insurance policies offer a host of coverage options you can add, from sewer and water backup to floaters for high-value items. Adding more coverage means a higher premium.

5. Claims history for the homeowner and the home

Past claims are one of the strongest indicators insurers use to predict future claims. Your own claims history, previous claims filed on the property, and claim activity in the surrounding area can all lead to higher premiums because they signal a greater insurance risk.

"There's a significant correlation between claims that are made and future additional likelihood of claims being made," says Chris Hackett, senior director of personal lines policy at the Property Casualty Insurers Association of America.

Claims that can affect current rates on your home include:

Your personal claims history. Even if it was at a different home, past claims you have filed could increase your rates.
The home’s claims history. Claims filed in the past at your address can impact rates, even if you didn’t file them.
The area’s claims history. A lot of claims for similar issues in the surrounding area can increase rates; for example, a lot of hail damage claims or claims for burglary.

Why did my homeowners insurance go up?

Homeowners insurance rates have increased across the country because rebuilding homes has become more expensive. Higher labor and material costs, inflation, and more frequent natural disasters have increased claim costs, prompting insurers to raise premiums even when nothing about your home has changed.

If you see an increase in your home insurance that seems excessive or for which there is no explanation, contact your insurance company and ask for the reason.

How to save on homeowners insurance

You can lower your homeowners insurance costs by reducing risks and qualifying for discounts. Updating your roof, installing security devices, increasing your deductible, maintaining good credit, removing hazards, and comparing quotes from multiple insurers are some of the most effective ways to save money.

Here’s what you can do to save on home insurance.

Make improvements to the home. A new roof, storm shutters, hail-resistant siding - anything you can do to reduce the risk of an expensive claim can lower your rates.
Add safety and security devices: Many insurance companies offer a discount for adding a burglar alarm, smoke detectors, fire extinguishers, and other protective devices.
Improve your credit. Your insurance score will go up along with your credit score, and your insurance rates will go down.
Raise your deductible. You’ll get a lower rate in return; just make sure you can manage the amount if there’s a claim.
Remove risk factors. Get rid of the trampoline, make sure you don’t have old appliances or broken-down cars on your property and anything else that insurance companies consider an “attractive nuisance” (in other words, a liability risk)
Shop around. The easiest factor to change is your insurer. Not all insurance companies calculate rates the same way. Shop around and compare rates to get the best price.

FAQ: Home insurance rates

Why is my home insurance so high, and what can I do about it?

Your rates may be high due to a combination of local weather risks, an older roof, a low credit score, or a history of claims. The best way to lower your rates is to mitigate on-property risks, raise your deductible, and shop around with different carriers.

Is homeowners insurance negotiable?

No, homeowners insurance rates are strictly regulated by state insurance departments. While your insurance company can offer you various discounts for safety features or bundling, you cannot haggle or negotiate the base rate itself.

Why does homeowners insurance increase every year?

Home insurance companies raise rates to keep up with inflation. Because the cost of rebuilding homes goes up, so do insurance rates. Claims paid in the previous year will also impact rates as insurance companies balance what they take in with what they pay out.