How is Home Insurance Calculated

If you recently started the home buying process and are just waiting on closing day to arrive, your to-do list is likely pretty long by now. During this time, you’re probably thinking about everything from which day to schedule the movers to what new furniture you’ll need for the house. But don’t forget that on closing day, you’ll be expected to show proof of homeowners insurance coverage. This means now is the time to start looking for an insurance company that can offer you the policy you need within your budget. So, how is home insurance calculated and what can you expect to pay? Take a look at the details that factor into the cost of the standard homeowners insurance policy.

The Amount of Coverage You Need

One of the most important aspects of your policy is the extent of the coverage it provides. To start, keep in mind that there are several types of homeowners insurance, but the most popular plans provide three kinds of coverage.

Dwelling Coverage

The first kind is dwelling coverage, which will pay for repairs or replacements for your house as needed. This covers losses related to the structure itself, not the land or the contents of your home. So if your house is damaged or destroyed due to a covered hazard—such as fire, vandalism, hail, explosion, falling objects, and more—your insurance will pay for repairs or replacements as needed.

Note that most standard plans include additional living expense (ALE) coverage to use for extra costs if your home is unlivable while it’s being repaired or rebuilt. This means it covers the cost of additional living expenses you might have—such as eating at restaurants, doing laundry, and renting furniture—while staying at a hotel or short-term rental when your home is destroyed.

Personal Property Coverage

Another type of coverage is referred to as personal property coverage. This pays to replace or repair personal belongings in the house if they’re destroyed or lost. So if you lose clothing, furniture, appliances, and more due to fire, theft, or other hazards, your personal property coverage will pay to replace it.

Liability Coverage

Finally, liability insurance provides financial protection in the case of legal issues. For instance, if someone is injured while on your property, he or she can file a lawsuit against you to get the ensuing medical bills paid for. When you have homeowners insurance, your policy would pay those bills so they don’t come out of your pocket.

Coverage Limit Estimates

So how is home insurance calculated? A major part of this calculation is your coverage limit for dwelling, personal property and liability insurance. This can vary quite a bit, but you can get an idea of the recommended limit for each type of coverage before you get a policy.

For instance, your dwelling coverage limit has to be enough to pay to rebuild your house if it’s ever destroyed. Your insurance company will calculate this for you, but in general, it costs about $150 per square foot to rebuild a home. As far as personal property coverage, note that most insurers put the coverage limit for this at about 50% to 75% of the dwelling coverage. So if your dwelling coverage is $200,000, your personal property coverage may be about $100,000 to $150,000. And for liability coverage, the minimum is usually $100,000. But the more you get, the better protected you are in case of a lawsuit, so some experts recommend $300,000 or even $500,000 for your liability coverage limit.

Of course, the higher your coverage limit is, the higher your premium will be. The average homeowners insurance policy in the US is $1,631 per year for the premium, based on a policy with $300,000 for dwelling coverage, $150,000 in personal property coverage, and $300,000 for liability. You can reduce this amount by increasing your deductible—which is the amount you pay before insurance covers your costs. Clearly, coverage limit and deductible both play a major role in your home insurance cost. But that’s only half the answer to the common question “how is home insurance calculated?” There are other factors, too.

Location of the Home

Another detail to take into account for insurance cost is location. Some areas simply have higher home insurance costs, and it’s typically due to natural disasters that occur in those regions. For instance, Oklahoma, Kansas, Texas, and South Dakota have the most expensive home insurance premiums in the US. That’s largely because these states are most susceptible to tornadoes, which can lead to expensive repairs that homeowners insurance covers.

Of course, tornadoes aren’t the only type of natural disaster you have to worry about once you own a home. Some areas are also affected by hurricanes and mudslides, which is why your proximity to a coastline has an effect on the cost of your policy. Generally, the closer you are to the coast—especially the Atlantic or Gulf Coast—the higher your premium will be.

Similarly, the farther you are from a fire station, the higher your premium will be, since your house may have a higher chance of burning down before firefighters arrive. And if you live in an area that’s prone to flooding, you’ll need to purchase another type of coverage altogether—called flood insurance. This is because the average homeowners insurance policy doesn’t cover flooding, which is another reason to consider your location when figuring out insurance cost before closing on a home.

Home Features

Now that you know how much location and coverage matter when it comes to how home insurance is calculated, you might wonder if your specific house has any bearing on the cost. The answer is yes. In fact, everything from the square footage and age to the type of home and the materials it’s made of will matter when calculating the cost of your premium.

For example, if your home is made of masonry, the insurance premium will likely be cheaper than if it were made of wood. And if the roof is made of metal or asphalt, the premium will typically be lower than it would with a wooden roof, since these materials are usually more fire-retardant and cheaper to replace than wood.

Certain features you might have added to your property can also affect your home insurance premium. For instance, a security system and deadbolt locks can reduce the cost, while a swimming pool or trampoline might increase it. So before you make any changes to your new property, check with your insurance company to see how they might affect your premium.

Claim History

So how is home insurance calculated? As you can see, most of the cost of this coverage has to do with the home itself, such as location, features, and the coverage it requires. But there’s one last detail you should factor in, and that’s the claim history.

First, there’s the claim history of the house, meaning whether the previous owners ever filed a homeowners insurance claim on the property. If they did, there’s a chance your policy on the same house will be higher, especially if the cause of the previous claim hasn’t been fixed. Claims that involve water damage, fire, theft, liability, and dog bites usually have the biggest impact on the home’s premium. You can usually see the claim history of the home you’re buying on a database called the Comprehensive Loss Underwriting Exchange (CLUE), which can be requested by you, your mortgage lender, or your insurance company.

If the house you want to buy has never had a claim filed on it, that’s good news. But have you ever filed a claim on a past property? If so, your premium may be higher than usual. And if your neighbors have filed a lot of claims on their homes, this might affect your insurance rate, too. So keep these details in mind as you get a rate quote for home insurance.

Clearly, there are lots of factors that affect your home insurance policy’s cost. If your only question about getting insurance for your new home is “how is home insurance calculated?” you likely have your answer now. But if you have any other questions—or if you’re ready to get a home insurance rate quote—contact LemonBrew Insurance. We can give you the answers you need and even help you save money by bundling auto insurance with your home insurance or life insurance policy, so contact us today to get started!

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