How Is Home Insurance Calculated?
Home insurance is essential for keeping your house and your belongings protected, however, few people understand how your home insurance is calculated.
At Jeffery & Spence, we’re pleased to provide you with all the information you need to better understand your home insurance policy. Home insurance premiums are based on an assessment of overall risk. Many factors are considered when your home’s insurance rates are determined.
Features of your home that create a higher risk of covered “perils” will result in higher premiums. Here are some of the key considerations that go into determining how your home insurance is calculated:
Age of Your Home
One of the first things your insurance provider will consider for your home insurance coverage is the age of your home. As a building ages, various risks associated with the property will increase, and this can influence your premium.
For example, older homes tend to have a greater likelihood of a faulty piping system, and therefore more risk of flooding caused by pipe breakages. A home with an older roof is also more susceptible to water damage. Older homes are often equipped with riskier heating systems, such as oil heating.
When doing home improvements, it is best to keep your insurer informed. Not only will they ensure that you are adequately protected, but your updates (roof, electrical system, furnace or plumbing) may reduce your premiums.
Size of Your Home
The size of your home is another important factor that will impact what it would cost to repair, replace, or completely rebuild your home in the event of damage or total loss.
More furnished space, such as a finished basement, could also increase the reconstruction value of your home, and may increase your premiums. This is because, in the event of a loss, the drywalling, wall dressings, contents, and flooring would all need to be replaced.
If your basement was not finished when you first took out your insurance policy, and you subsequently finish it, this should be reported to your insurer. While your premiums may rise, the costs of rebuilding the basement may not otherwise be covered if you failed to be forthcoming about it. Other factors like the size of the lot, water coverages, your mortgage, and whether the inhabitants are smokers will also impact your home insurance costs.
Expert Tip: While your insurance provider may check your credit score as part of the home insurance premium calculation, it is important to note that it will only be a soft credit hit and won’t negatively impact your credit rating.
Location of Your Home
The location of your home matters because it shows your insurance provider how much risk is associated with your property.
Factors such as how densely populated your neighbourhood is, how far your home is from fire hydrants and fire stations (increasing time of first responders), as well as the local crime rates could have an impact on your insurance policy premiums.
The infrastructure in the area may also have an impact on your insurance. If the infrastructure is older and the company has experienced a large number of claims in the area, the water damage or sewer backup premiums may be higher.
Your location will also determine your risk for natural disasters. Hurricanes, hail, tornados and other weather events can cause major damage to your home, so it’s important that you find out what your home insurance covers and whether you’ll need to purchase additional coverages for these risks. While most insurance policies cover wind damage, they might not cover floods or earthquakes.
The Contents of Your Home
Your home insurance includes protection for its contents, which will cover the items in your home up to a specific amount. For this reason, it’s important to take an inventory of your belongings and calculate how much contents coverage you might need, based on their value.
Most home insurance policies offer contents coverage that matches the coverage amount for your home’s structure — it will be determined as a percentage of your building value. If your personal belongings like furniture, clothing, appliances, and electronics exceed that amount, you’ll want to consider increasing your coverage amounts.
Of course, if you underestimate or report the value of the contents of your home, you may not be reimbursed for the true value of the contents.
You should also remember that certain contents do have limitations and exclusions under most policies. Some of these may include limits to jewellery, collectibles, bicycles, furs, etc. You should always contact your insurer to confirm what these exclusions and limitations may be under your policy.
Expert Tip: For higher value items, like jewelry, we recommend getting professional appraisals before purchasing extra coverages, and if you have high-value items in your home, we highly recommend keeping photographs and receipts for proof.
Materials and Architectural Features of Your Home
It is obvious that the size of your house will affect the rebuild cost in the event of a fire or flood. However, so too will the quality of materials used in your home, and the quality of the design and construction.
High-quality materials may increase your premiums, as they increase the costs of rebuilding your house. However, high-quality materials and quality construction may also decrease your premiums if they assist in making the house sturdier and more resilient against the forces of nature.
Architectural features such as the type of roof on your house will also affect your premiums. Certain types of roofs are more prone to leakage, and certain architectural features make water drainage and snow removal more difficult (for example, flat roofs).
Your home may also cost more to insure if your risks are greater because of certain features. These features may include — but are not limited to — inground pools, hot tubs or outdoor bars, fireplaces or kitchens. If you run a business out of part of your home, whether you have clients coming there or not, you should discuss your business insurance to ensure you are properly insured.
Heating & Electrical Sources
Heating your home with oil instead of a forced-air gas furnace or electric heat will lead to higher premiums. This is because there may be a risk of leakage from an oil tank that could damage your property and pose environmental hazards.
Wood stoves are also particularly risky, increasing the risk of fire, and having one installed in your home may shift premiums upwards.
Your electrical system can also raise your premiums, particularly if the flow of electricity into your home is less than 100 amps. The insurance company may decline to write your home if you have an older type of wiring and have fuses instead of breakers.
Alarms, Smoke Detectors & Security Systems
Although these seem relatively insignificant, the number and nature of smoke detectors, break-in alarms, and the availability of fire extinguishers may factor into your premiums.
Having a sophisticated alarm system that alerts the police in the event of a break-in may help lower your premiums. Similarly, installing deadbolts and first-rate locks on doors and windows help make your home safer, and can result in reduced premiums.
Your Claims History
Just like your driving record can impact your automobile insurance policy premiums, your past home insurance claims record may impact your home insurance premiums. You may also qualify for a claims-free discount if it applies.
Shifting Coverages within Your Coverage Amount
When you buy home insurance, your home insurance policy will typically have four separate coverages in differing amounts. For example, in addition to coverage for the home and coverage for its contents, you may have coverage for detached structures and additional living expenses.
If you don’t have a detached structure on your property, you can opt to switch the coverage amount to one of the other coverage categories, as long as you don’t exceed the total coverage amount of your policy.
If you have questions about home insurance policies or would like to request a quote, contact us and one of our knowledgeable team members will be happy to help.