The Cost of Homeowners Insurance and How to Lower It

< previous: Common Homeowners Insurance Policy Endorsements In 2020, the average annual premium for homeowners insurance ranged from $1200 to $1400. Rising home values, higher repair and rebuilding costs, and greater catastrophic losses from hurricanes have increased premiums significantly in recent years. Major factors that determine how much insurance companies charge for homeowners insurance include:

  1. chance of a loss
  2. average amount of loss
  3. insurance policy specifics, such as the type of policy, endorsements, and the amount deductible

Almost all more specific factors can be grouped under 1 or the other major factor, and many will influence both. Listed below are the major factors that pertain to the residence. Note, however, that since homeowners insurance also covers liability, other factors may affect the cost of insurance. For instance, according to a recent report, dog bites represent 1/3 of the claims under a homeowners policy. So, having a dog, especially a Chow, Doberman, German Shepherd, Pit Bull, Rottweiler, Wolf Hybrid, or mix of these will probably have higher premiums.

Factors Affecting the Chance of a Loss

Many factors affect the chance of a loss.

The construction of a home is an important consideration. A house made of brick is more fire resistant than one of wood, and if there is a fire, there will probably be less damage to the brick house.

The location of the house also affects the chance of a loss. Certain locations are more prone to losses than others, so insurance companies rate different territories for underwriting risks. Locations with higher losses will be charged higher premiums.

Another factor related to location, but affecting the amount of the loss more than the frequency, is the fire-protection class of the location. The Insurance Services Office (ISO), which provides information about underwriting risks to many insurance companies, rates territories from 1, which is best, to 10. Other factors related to fires are the distance of the home from the fire department and fire hydrants or other water supplies. For this reason, coverage in rural areas tends to be more expensive.

Most insurance companies use credit-based insurance scores for rating risks for both home and auto insurance. Several studies by actuarial groups, notably Tillinghast Towers-Perrin and the Casualty Actuarial Society, have found, with a statistical correlation exceeding 99%, that the loss ratio, the ratio of losses and associated expenses to premiums, is significantly higher for people with lower scores. In fact, for those with the lowest credit scores, the loss ratio actually exceeds 1, where losses exceed the premiums collected. A recent study by the Texas Department of Insurance showed that the loss ratio for homeowners with the worst scores was triple that of those with the highest scores.

Insurance scores depend on the credit history of a person. The Comprehensive Loss Underwriting Exchange (CLUE) Report is like a credit file on a house, based on the claim history of the house. Insurers may use the CLUE report to drop or deny coverage based on a home's history of claims or damage reports. Used previously to find fraud and consumers who file many claims, insurers are now using CLUE database to exclude greater risks, especially if a claim or even a report from the homeowner, indicates that the home may be susceptible to mold, water damage or flooding.  The CLUE report lists the type and date of loss, and the amount for each claim for the past 5 years. This report is maintained by LexisNexis Risk Solutions, formally known as ChoicePoint.

You can obtain free copies of your CLUE Auto Report and CLUE Personal Property Report at LexisNexis Personal Reports.

Factors Affecting the Amount of the Payout

The insurance policy itself affects the amount of payout, including the type of policy, any endorsements, and the amount of the deductible.

The main difference between different types of policies is whether the coverage for the main residence is a named-perils policy or an all-risk policy, and which type of policy covers the other sections, like personal property. A named-perils policy covers only losses resulting from perils listed in the policy; an all-risk policy covers any risk unless specifically excluded. With a named-perils policy, the proof that a loss is covered rests on the insured; with an all-risk policy, the proof is on the insurer. Thus, an all-risk policy will have higher premiums than a named-perils policy.

A higher deductible will also reduce premiums. The standard deductible for most losses on a homeowners policy is $250. Raising it to $1,000 or $2,000 can reduce the premium significantly — perhaps 25% or more. Raising it higher, however, will not reduce the premium proportionately.

Most endorsements add coverage to the standard policy, and therefore increase premiums.

Shopping for Homeowners Insurance

The best way to save on homeowners insurance is to shop around. Determining the amount of premiums to charge is an inexact science to be sure, so there is wide variation in the amounts charged — the highest premium could exceed 4 times the lowest premium, a big difference for something you pay year after year. Sometimes, insurers will lower their prices for new business, so it may pay to shop around for rates periodically. The best way to do this, nowadays, is to go to the many websites that allow you to enter your information once and get quotes from several vendors. Also look at reviews for home insurance, including those by Consumer Reports, which can be accessed through many public libraries; members may even access it online at home, using their library card number to log on.

If you have multiple insurance policies, ask each insurance provider what kind of deal you could get if you transferred all of your accounts to the one provider. Most insurance companies give discounts if you have more than 1 policy with them.

Ask about any discounts, since different insurers provide different discounts. Common discounts are given for a newer home, fire and smoke alarms, sprinkler systems, fire extinguishers, and dead-bolt locks. Other possible discounts include home improvements that reduce risk, such as adding storm shutters, or modernizing your home's plumbing, heating, and electrical systems.

Some people try to save money by insuring less than the full value of their home, since a partial loss is far more likely than a complete loss. However, if your home is less than 80% insured, a coinsurance penalty will be applied, reducing the amount of recovery commensurate with the amount of underinsurance.

To reduce premiums, and to avoid the coinsurance penalty, you might want to insure, let's say, 85% or more of its value, depending on how much risk you want to assume, and increase the amount annually by how much you think your property value has increased.

Another way to reduce premiums is to improve your insurance score. Although insurance scores are calculated using the information in your credit file, only some of the information is used and it is weighted differently than the information used to calculate credit scores. Greater weight is given to payment history and total debt, and less for types of credit used or the number of inquiries made for loans and credit, than in credit scores, for instance. Thus, lower debt and making timely payments will help to boost your insurance score. This may also be a good reason to shop around periodically. After the initial application, an insurer may not look at your score again, so if you have improved your score recently, shop around for insurance again to see if you can get a better deal.

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The Economics of Homeowners Insurance

In the 19th century, firefighters often were paid, not by tax dollars, but by the owner of the burned property, either out of pocket or by the owner's insurance company. So firefighters were inclined to fight fires only on insured property, or where the owner had the financial wherewithal to pay for their services. To save money, some insurance companies gave homeowners plaques to indicate that the property was insured, so that firefighters would be motivated to try to save the property — it was a cheap way to prevent a total loss, at least sometimes.

Nowadays, insurers aren't handing out plaques, but some people, notably the wealthy, still get better services than others. With wildfires raging in Southern California, Insurance company save money by protecting the homes of the wealthy. Firefighters working specifically for the insurance companies protect people's homes by applying the fire retardant Phos-Chek, also used by the U.S. Forest Service. However, only homes worth at least $1,000,000, generating at least $10,000 in annual premiums, get the special treatment, although some people with standard policies also get the special treatment if they happened to be nearby. Many people resent this special treatment for the wealthy, but it makes economic sense, since saving even 1 home pays for the program, especially since many of these homes are worth more than $3 million. While not every home is saved, it stills saves insurance companies much money.