There are a number of factors that insurance carriers take into consideration when setting the rate they will charge to insure your home. In this post, I’d like to explain how Homeowners insurance premiums are determined, in an effort to take some of the mystery out of how much you pay for your coverage.
The first and most obvious factor is how much your home will be insured for. The Dwelling limit on your policy determines the base rate that you pay, which is then adjusted based on other factors we will explore below. In most cases, the Dwelling limit is based on an estimate of what it would cost to rebuild the home if it suffered at total loss. Therefore, the size and features of the home drive how much it is insured for and how much you pay to insure it.
Another big factor is the deductible you choose. The average deductible these days is $1000, but there could be significant savings to raise your deductible with many carriers. For example, you might see an insurance company offer a fifteen percent discount to go to a $2500 deductible or a maybe thirty-five percent discount to move up to $5000.
Of course, it also matters what coverage options you choose. Coverages typically offered as optional for an additional premium include water backup, identity theft, open peril personal property, enhanced coverage for jewelry or firearms, increased coverage for outbuildings, mechanical breakdown, earthquake and many others.
Beyond the base rates for the coverage selections you choose, another important factor is whether or not you bundle your Homeowners and Auto insurance with the same company. Many insurance companies offer discounts ranging from ten to thirty percent or even more off your Homeowners insurance premium when you also buy your Auto insurance from them.
Almost all insurance carriers also use your credit history as a factor in determining your rates. This is because studies show that, statistically, home owners with favorable credit histories suffer fewer or less severe losses than average, and vice versa. Depending on the carrier, this might be a relatively minor factor or it could be huge. I’ve seen insurance companies price the difference between the best and worst credit history at around twenty-five percent. I’ve also seen cases where a carrier might charge the lowest credit score two to three times as much as the highest score.
Your distance from fire protection also can have a big impact on your rate. The lowest rates are reserved for homes within five miles of a fire department and one thousand feet of a fire hydrant. But many of us in northern Minnesota live further out from the fire station, which does increase insurance costs, because it is less likely our home could be saved if a fire started.
Beyond how far you live from town, another factor is the region where you live. Minnesotans pay a lot more to insure their homes then, for example, someone living in Idaho or Nevada, because we tend to experience more storm damage here than folks out west do. There are also differences in pricing within the state, also based on historical storm damage trends. The good news is that here in Bemidji, we are just within the wooded northeast region of Minnesota that tends to see the lowest insurance costs based on storm trends. I would say that in general, home owners living further north and east in the state pay less for insurance than those living further south or west.
Features of your home also come into play. Many insurance companies will provide discounts if your roof, heating systems, electrical and/or plumbing are new. If your home is older and these haven’t been updated recently, you will definitely pay more for your insurance than if your home was just built. You may pay less if you have a steel roof instead of shingles, as it is less likely to be damaged in a storm. Insurance carriers also usually provide small discounts for deadbolt locks, fire extinguishers and monitored alarm systems. Plan to pay more for coverage if you have a woodstove, due to the increased risk of fire. Less conventional construction types, such as manufactured homes and log homes, also often cost more to insure.
Last but certainly not least, insurance carriers look at your prior claim history. If you have filed a claim before, statistically you might be more likely to suffer another loss in the future. For this reason, most insurance companies add a surcharge if you have been paid for a non-weather claim in the past three years.
All of these factors and more are often specified with the rates that a given carrier files with the state of Minnesota. While the factors are complex, carriers must charge you premium that exactly reflects the rates that they filed with state.
To summarize, insurance pricing is based on the statistical likelihood of a future covered loss, combined with how much the carrier is likely to have to pay if such a loss does occur. While some insurance pricing factors can certainly be frustrating at times, the good news is that we have a competitive Homeowners insurance marketplace in which carriers are competing to offer you the best deal they can while still collecting enough premium to at least break even. If you are concerned that you might be paying too much, I’d suggest talking to an independent agent like me who can shop among their carriers within this competitive marketplace to find the best value.
Curious to see actual examples of home insurance costs in the Bemidji area? Click here to read what some of our other clients pay to insure their homes with us.
Ken Cobb is owner of Pine Country Insurance and has been active in the insurance industry for over 15 years. Meet Ken.
Coverage descriptions found in this blog are summaries provided for general educational purposes and cannot fully detail the terms, conditions, limitations or exclusions of a specific insurance policy. Please read your policy carefully.