How is my homeowner’s insurance premium determined? Homeowners Insurance pricing is complicated making it difficult to choose the best policy.
Q: We put in a bid on a 1920s home in the Chicago area for $275,000. I called my insurance company to get a quote and they told me it would cost around $1,800 a year. My parents pay only $800 a year for their homeowner’s insurance policy and their home is worth over $500,000.
How do insurance companies charge for homeowners insurance policies? Is it based on the age of the home?
A: The age of the home is only one part of the puzzle when it comes to how insurance companies determine what you will pay for your homeowner’s insurance premium.
And, we’re not really surprised that you’re confused over the way premiums get priced. When Sam deals with homeowners insurance companies, he is also typically somewhat confused and puzzled. (Sound familiar?)
But let’s start by talking about the characteristics an insurance company will evaluate when pricing your insurance policy: the home’s size, the materials with which it’s built, the location, the age, and the type of property (condo vs. single-family home). In addition, you might “earn” a discount off the policy if you buy your homeowner’s insurance policy and auto insurance policy together or if you install an alarm system.
Let’s start with size. If your parents home is twice as big as your home, you’d expect your parents’ homeowners insurance policy to cost roughly double what yours might cost. But there are other considerations, like the cost to reconstruct the home if it is totally destroyed.
For example, let’s say your parents’ home burns down and so does yours. Your home is 2,000 square feet and your parents home is 4,000 square feet. The insurance company might look at their charts or computer models and figure out that it will cost about $200 per square foot to rebuild each of these homes. So, the insurance company would have to shell out $400,000 to rebuild your home and $800,000 to rebuild your parents home.
But if one of the homes has top of the line finishes and the other is in lousy shape, the cost differential to rebuild might be even greater and it might even be more than the market value of the property.
That’s why insurance companies look at the age, type of construction, the finishes, the amenities, location (because the cost to rebuild might be greater in one location than another due to local building codes and extreme weather hazards) and a multitude of other factors to come up with a number.
Say your home is in a remote area and getting supplies and contractors to that remote area is costly, we’d expect your homeowner’s insurance premium to be higher than if the insurance company had to rebuild the same property in a lower cost area where supplies and tradespeople are readily available.
In addition to all of that information, insurance companies may also look at your credit score and credit history, and past claims history to determine pricing. Still, you need to make sure you’re buying the proper type of insurance and amount of coverage so that you can build should catastrophe strike.
Some insurance policies will indicate that the policy covers “replacement cost,” but you need to know what the limitations are on the amount they will pay. They may pay only up to the insurance limit. In some cases, they may cover a tad over the insurance limit and in still others, the insurance company will pay whatever it takes to rebuild your home. Each one of these policy limits might cost different amounts.
Your parents’ policy may have one type of coverage and your policy might be better than your parents. And then there’s the bundling with other coverages, such as sump pump and backup sewer, inflation endorsements, and a myriad of other coverages.
If you’re not dazed and confused yet, you will be soon. But writing this column brings home all the pain and suffering that homeowners across the country have endured with this year’s crop of wildfires, hurricanes, and devastating storms. These catastrophic losses mean tens of thousands of Americans have to contend not only with rebuilding their homes but their lives.
And that’s something even the best homeowners insurance policy can’t fix. We hope 2019 will be a more peaceful year.
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