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Determining Home Insurance Premiums |
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Written by Ethan Hawke
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Like any other insurance product, the premiums you pay for home insurance are determined by the risk of loss your insurer thinks you pose to the company.
When your insurer issues a policy on your home, he or she is making a bet that it won't experience an occurrence covered by the policy that will force it to pay to rebuild or fix your home. Insurers hedge their bets by spreading the risk out across a pool of insureds, who they insure at differing premiums based on the potential for loss they pose to the company. The premium is the amount you pay for your insurance coverage. This is usually broken up into monthly installments.
Actuaries and underwriters Insurance companies pay actuaries whose job it is to determine how much the company needs to collect in premiums to stay solvent and profitable. The actuaries determine this amount by estimating how many losses the company will take, how much the company needs to spend on advertising and administration and how much cash the company needs to keep in reserve in case there's a major catastrophe that will cause a large number of claims all at once (Hurricane Katrina, a major earthquake, etc.).
Actuaries set guidelines for the company's underwriters. These are the folks who determine whether a home is insurable and how much the insured should be charged in premiums. Every company has it's own set of underwriting standards, which is why some people may be uninsurable by one company but obtain a policy from another one, and why some companies offer better rates to consumers than others.
PremiumsUnderwriters examine a number of factors when determining what your premium will be for home owner's insurance. Understanding these factors will allow you to make choices that may get you a lower premium.
- Coverage amount -- The more coverage you buy for your home, the higher your house insurance premium will be. Typically, the more expensive your home is, the more coverage you'll need to buy for it, and thus the higher your premium will be.
- Coverage type -- Once again, the more extensive the coverage you purchase, the more expensive your premium will be.
- Location -- Homes in high crime areas and areas that are prone to weather or other natural disaster damage are likely to have higher premiums. If you're close to a fire station, your insurance may actually be somewhat cheaper.
- Materials -- Premium rates may vary based on the types of materials used in the construction of your home. Materials that are of poor quality, or that may easily catch fire will likely cost you more in insurance premiums.
- Age -- Older homes aren't as likely to be up to modern building and wiring codes, and thus are statistically more likely to catch fire or to be susceptible to weather damage, thus raising your premium.
- Cash value vs. replacement cost provisions -- Your premium may vary depending on whether valuation of losses are set at cash value or the cost of replacing your home.
- Riders -- Options and extra coverages added to your policy are likely to drive the price of insurance up. Adding riders for injuries that may happen to visitors to your home or insuring your property away from home will likely make your policy more expensive.
- Deductible -- The higher your deductible, the amount of a loss you pay out of pocket, is, the lower your insurance premium will be.
Average home insurance premiums by stateThe average cost of a home owner's policy can vary greatly from state to state. Home values, construction and materials cost can be very different from Albany, Ga. to Albany, N.Y.
The following is a list of average yearly home insurance premiums by state for 2006, the most recent year reported on by the National Association of Insurance Commissioners:
- Alabama -- $894
- Alaska -- $850
- Arizona -- $640
- Arkansas -- $640
- California -- $937
- Colorado -- $813
- Delaware -- $530
- D.C. -- $1,012
- Florida -- $1,386
- Georgia -- $703
- Hawaii -- $776
- Idaho -- $477
- Illinois -- $674
- Indiana -- $638
- Iowa -- $596
- Kansas -- $866
- Kentucky -- $637
- Louisiana -- $1,257
- Maine -- $573
- Maryland -- $721
- Massachusetts -- $925
- Michigan -- $715
- Minnesota -- $788
- Mississippi -- $988
- Missouri -- $707
- Montana -- $666
- Nebraska -- $783
- Nevada -- $693
- New Hampshire -- $669
- New Jersey -- $726
- New Mexico -- $638
- New York -- $869
- North Carolina -- $649
- North Dakota -- $742
- Ohio -- $530
- Oklahoma -- $1,018
- Oregon -- $502
- Pennsylvania -- $643
- Rhode Island -- $919
- South Carolina -- $851
- South Dakota -- $628
- Tennessee -- $706
- Texas -- $1,409
- Utah -- $494
- Vermont -- $677
- Virginia -- $662
- Washington -- $603
- West Virginia -- $650
- Wisconsin -- $490
- Wyoming -- $648
Shop smart when buying a home or coverage to get a competitively priced insurance policy. When building and buying a home, consider what impact factors such as age, materials and location will have on your insurance premiums. When buying a policy, carefully examine what it covers and other factors such as your deductible and choose a policy you feel provides the coverage you need, and avoid frivolous or unnecessary riders or additional coverage. |
