As many home owners have discovered, Homeowner’s insurance premiums are becoming more and more expensive. This article covers some of the causes for its increase and which factors play the largest role in determining the price of premiums. Most importantly, we will also cover ways you can offset the cost of rising premiums, pick the right one for your needs, and save money.
The Rising Cost of Home Insurance
The cost of homeowners insurance has clearly been increasing over the past few years. In 2010, the National Association of Insurance Commissioners (NAIC) reported an average annual cost of $909 for homeowners insurance.
By 2018, it was estimated that the average cost was $1,249. This represents an increase of nearly 54% over the past ten years. In 2021, the Insurance Information Institute found the nationwide average for an annual premium has increased even further to $1,398.
All of this begs the questions, “what is driving the rising cost of homeowners insurance?” And “what can homeowners do to decrease the cost?” But, to answer these questions, we first need to understand the different kinds of home insurance coverage types.
What are the different types of home insurance coverage?
Home insurance policies have three separate degrees of coverage. From lowest to highest, the levels are actual cash value, replacement cost, and guaranteed replacement cost. It is highly likely you will be afforded the option to pay an additional amount each month on your premium to obtain a higher level. This higher degree allows for more expansive protections. You get what you are willing to pay for essentially and that’s why shopping around online for the best policy is critical.
Actual cash value
This is the least expensive and also the lowest degree of coverage. The Actual cash value policy functions exactly how it sounds. Your homeowner’s insurance carrier will reimburse you for the value of your possessions and the value of your house after they subtract depreciation. Be aware that the amount that is paid out in this kind of policy is likely less than you will need to replace all of your things if something were to happen.
Replacement cost coverage is the middle ground level of protection. It will be more expensive than the actual cash value policy. This is because it provides reimbursement of your home and belongings without considering depreciation. This means it will likely pay for the full cost it takes to repurchase new possessions or reconstruct your house.
Guaranteed replacement cost
This is the greatest degree of protection that can be afforded to a homeowner, and it is the most expensive. The difference between this tier and the other two is it goes beyond typical replacement costs. If your home is damaged or destroyed by a natural disaster, the construction costs can be exorbitant. The guaranteed replacement policy will ensure that you get new possessions or reconstruction costs covered even when they go over normal policy limits. You can also pay for higher coverage limits by raising your monthly premium payments.
Why are homeowners’ insurance prices rising?
The recent spike in the sales and prices of residential homes all over the United States and the increase in natural disasters have had a great impact on the cost of homeowners insurance. Hurricanes in the Southeast and wildfires in the Western states mean the trend of rising demand for homeowners’ insurance is probably going to persist. These recent disasters are adding onto an already challenged housing environment.
Additional factors like volatile lumber prices, building material shortages, and supply chain issues are likely to push rates even further as property values continue to climb.
That said, homeowners insurance rates vary broadly depending on several factors, particularly location. People who live in a metropolitan area or just a more densely populated area will likely have to pay higher rates. This is due to the difference in home values between urban and rural areas as well as other risk factors like a higher incidence of theft.
As you might expect, states that are more susceptible to natural disasters like floods and forest fires typically pay greater home insurance rates than states that do not have as many.
These are not the only factors that impact pricing. A premium’s cost can similarly be determined on the age of the house and the cost of reconstructing it, and the particular coverage limits of the individual policy. That said, some factors have more impact on a policy’s cost than others.
What Factors Have the Most Impact on Your Home Insurance Cost?
The primary concern for insurance companies is risk. Typically, the more risk involved with insuring a home, the more expensive the policy. Because of this, certain considerations, such as a home’s age or the person’s claim history, have greater weight than other factors when calculating the price. These are the most significant factors that impact the price of a homeowners insurance policy:
- Home Location: As mentioned previously, your home’s location is very important. The base rate for coverage is going to look at population density and the number of natural disasters in your location. This is partly why coverage can vary a great deal state-to-state.
- Coverage Type: The coverage type determines your level of protection. As this level increases, so does the risk for the insurer. As a result, the actual cash value policy is more affordable than the replacement cost policy. But it may be worth paying a bit more to not have the depreciation subtracted from your reimbursement amount if you do need to file a claim.
- Deductible Amount: In general, the greater the deductible, the cheaper the premium expense will be. However, the tradeoff is that you will have to pay more to file a claim in a time of crisis. Make sure you weigh this potential premium savings against what you are prepared to pay to get your claim started. Different policies have different options so make sure you check and shop around for policies until you find a good fit.
- Dwelling Coverage Amount: This is a major consideration in the premium pricing because the more value your house has, the more costly it is to reconstruct.
- Personal Property Coverage: A standard homeowners insurance policy routinely gives 70–75% of the dwelling coverage as personal property coverage. However, personal property coverage can be raised beyond the default level defined in the policy. Personal property coverage plays a substantial element in renters insurance pricing, similar to how dwelling coverage is for homeowners insurance.
- Credit Score: The majority of US states permit insurers to consider credit history when they decide on a home insurance premium. However, this is not the case for all states. California, Maryland, and Massachusetts do not allow the use of credit scores for this purpose.
- Frequency of Claims: The higher the number of filed claims, the more you will pay for home insurance. A claim usually remains “chargeable” for 3–5 years, and your record carries between different insurers and homes. Therefore, it is wise to be mindful of when to file a claim. Do your best to refrain from filing for cheap fixes and mitigate potential weather damage when possible.
- Age of Home: Statistically, older houses have a higher risk of filing insurance claims. It’s also probable that it will cost more to repair or replace the damage. For this reason, you may pay more if your home is older.
- Other factors: Miscellaneous other reasons can impact the cost of insurance but are typically less influential. This can include factors like roof type and age, hostile pets, security systems, and the location of the closest fire department.
How can you reduce the cost of your homeowners insurance?
By far, the simplest and most effective method to reduce your homeowners insurance cost is to shop around and get quotes from several different insurers. The best time to get a new policy is when the old one is expiring or if you have some large changes in coverage.
Another alternative is to raise your deductible. This is the amount you pay before insurance pays out your claim. Usually, the higher the insurance deductible, the lower the monthly premium. This can yield a good deal of savings but should be exercised with caution.
You should only increase your deductible to a level you know you could pay if something were to happen. For example, if you couldn’t pay for an unforeseen $4,000 charge, it would be smart to ensure your deductible is less than that. Otherwise, it renders your insurance useless when you need it most.
Further remember that in certain state or disaster-prone areas, you may have a separate deductible for certain kinds of damage (e.g. flood or tornadoes) so you need to check/adjust all your deductibles when shopping around for cheaper home insurance.
A third option is to investigate homeowner’s insurance discounts. There are several different kinds of discounts that can save you a fortune. For example, Michael and Kathy Brohawn, a Florida couple, encountered swiftly increasing insurance premiums over three years, to $5,596 in 2019.
In 2020, the couple added a hurricane-resistant garage door and several flood mitigation devices (many options on Amazon) to their home. They also upgraded a few windows to hurricane-strength level and employed a home inspector to document that their roof was tied down as per strict building-code standards.
These home upgrades cost about $3,000 in total; however, the annual premium plunged by around the same amount.
“We basically got all our money back in the first year,” Mr. Brohawn said.
The home insurance discounts differ for each insurer, but popular discounts include:
- Multi-policy discounts when you bundle home and auto insurance
- A loyalty discount. This is especially useful for buyers who have a history having filed few claims or who haven’t filed a claim before.
- Rebates can often be given when homeowners install hail-resistant roofs
- A discount for updated home security. This includes technology like smart smoke alarms, a lightning protection system, or a central alarm system.
- Some insurers provide discount for retirees or senior citizens. This is due to the fact that they are at home more often which in tern decreases the risk of theft related claims.
- Improving your credit score can help provide a lower rate as some companies will run soft credit checks for certain types of homeowner insurance.
Saving money on home insurance starts with picking the level of coverage that fits your needs. By understanding what factors have the highest impact on the cost of your policy you can mitigate some of the key reasons for higher prices.
Additionally, you can decrease you premium costs by increasing your deductible, taking advantage of home insurance discounts, and by shopping around for the best coverage and prices.
Finally, make sure you get an estimate for your homeowners insurance before buying or moving houses. It can reveal a lot about the property and area. Further you will having more negotiating power before the home purchase – so shop around and negotiate!