Guide to Home Insurance Rates

When buying home insurance learn how to control your costs

Home insurance rates will vary from company to company based on how each assesses the risk of your policy. Knowing what you are buying may help you influence the cost of your policy.

Insurance is an intangible. You can’t see it. That makes it difficult to understand what you are buying or how you can influence the cost of home insurance.

A Home owners insurance policy is like multiple policies rolled into one. You are buying property insurance, liability insurance, water damage insurance, fire insurance, and a host of other policies. This represents a wide variety of risks but we can simplify our view of the insurance when we realize that there are three basic criteria that are common to all of these forms of insurance.

How Insurance Companies Set Home Insurance Rates

Each insurer has their own formula for setting the price of insurance. This is why they come up with different premiums. Yet they all are trying to do the same thing. They are trying to determine the real risk that they will pay out a claim and the size of that claim if there is a loss. That risk will determine what premium they can offer a prospective client. If their analysis sets the home insurance rates too low they will lose money over time. If they set the premiums too high the prospect will buy from someone else.

To set that price they look at different categories of risks.

1. The risk of the home itself.

2. The risk of the location

3. The risk of the customer

The Home

Item 1 relates to all those bad things that can happen to a house because of how it is made or maintained. For instance very old wiring is more likely to cause a fire than wiring that meets today’s electrical codes. This is a risk specific to the house.

Insurance companies will want to know a lot about your house so they can appropriately assess the risk when they price your policy.

The Location

Two identical houses may incur different premiums just because they are in different neighborhoods. Insurance companies collect lots of data on losses incurred from things like fire, flood, theft and storms. Based on this data they know that certain areas are high risk for certain types of losses.

For instance my house is in the country in an area that has relatively little crime. The chance that my insurance company will have to pay me for a theft loss is low. However I live in a windy area so they may determine that my risk of wind damage is greater than normal.

Location also affects costs. Getting a roof repaired in Chicago might cost more than getting a roof repaired in Waco, Texas. If it does then insurance companies will have to pay out more in claims, so they will charge more to their Chicago customers to cover this cost.

The Customer

The last item is not obvious to most people. After all they are insuring a thing. Why should they care who owns that thing?

They care because experience has taught them that character affects home owner insurance claims. That is why it is often called a “home owners” insurance policy. Since they can’t measure character they settle for a proxy. Many insurance will consider your credit rating when pricing your home. The theory goes that people who are careful with their finances will be careful in other things.

On an individual basis that may not be true, but they have the data to show that they will have a higher claim rate with people who have poor credit.

Of the three items above item 2 is the one thing an existing homeowner will have little control over. A house isn’t going to move and a single individual isn’t likely to eliminate crime or keep the winds from blowing.

A prospective home owner will have some control over their home insurance rates based on their choice of neighborhoods. While it is not as big a factor as taxes, insurance costs may help a buyer choose between various houses.

Item 3 can be controlled, primarily by maintaining good credit and keeping your name out of the tabloids. Job losses, financial disasters and identity thefts are a bit of a wildcard, so we can’t always stay on top of the credit game but at least we have some influence on how we are perceived by the credit world.

Item 1 is the one I will focus on in the remaining pages of this article.

And So On

Here is a short break down of the remaining pages of this article.

1. Insurance is priced based on risks and costs related to the home, the location and the customer. This is what you just read.

2. I discuss the liabilities of owning a home and why insurance companies hate this word. This section includes my Great Dane story.

3. An overview of your personal property insurance and the types of property covered by home owners insurance.

4. Where your fire risks are and what you can do about it to reduce your fire insurance rates.

5. Insurance companies fear water damage and so should you.

6. Here I get into all the great plagues that can strike your house. Nature has a way of getting even, and it isn’t pretty.

7. The role home owners insurance plays when you are burglarized and how you can keep your home insurance rates low and have peace of mind about your property.


To Top of Page - How Home Insurance Rates are Set

To First Page in Series - Factors Affecting Home Insurance Rates

To Second Page - Home Owners Insurance and Liability Insurance

To My Great Dane Story

To Third Page - Home Insurance and Your Personal Property Insurance

To Fourth Page - Fire Insurance and Your Home

To Fifth Page - Insuring Against Water Damage

To Sixth Page - Natural Disasters

To Seventh Page - Man and Thieves and Property Insurance

Home - House Design


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