Owning a home is perhaps the largest investment you’ll ever make. It stands to reason that you will want to protect it by also investing in home insurance coverage. And if you’re carrying a mortgage, your lender will require it.
Insurance, like nearly anything else, comes in many forms and at multiple price points. You will want to shop around for the best coverage at the best price. That price tag for the “best,” by the way, might not be the lowest.
You will want to compare apples to apples among plans, so go in with your eyes open. There are many factors that will impact the cost of your policy. Here are six that might affect your insurance rates.
1. Policy Type
There are a whopping eight types of insurance policies designed to cover residences. One, HO-4, is renter insurance. However, the other seven are for homeowners.
When you obtain a homeowners insurance quote, you need to make sure you’re comparing the same insurance type. For example, HO-1 is the most basic policy that covers only specifically named perils. Therefore, rates for HO-1 and HO-3, which covers much more and provides liability protection, aren’t remotely equal.
HO-3 is the most common homeowners policy and for good reason. It typically covers more perils, structures, personal property, living expenses, third-party liability, and medical payments. If you’re going to pay for insurance, make sure you’re covering as much as possible or at least insure you’re covering everything you need to.
2. Location, Location, Location
Let’s say you sell your home in a small town and buy one in an urban area. It’s likely that you’ll experience sticker shock when shopping for homeowners insurance. Rates are going to be much higher for your new home, even if the value of it remains relatively the same.
Remember that insurance policy rates are based on risk, so where your home is will factor into that calculation. For example, how close your home is to water, or a floodplain is significant. So is the distance between your house and the nearest fire station.
Location is also historical. How often have claims in a certain area arisen from weather events and disasters? Does the area have a history of violence, vandalism, and break-ins? Location applies to insurance rates as well as real estate.
3. Age and Condition of the Home
Houses aren’t just monoliths where every one of them are the same, even if they’re in the same neighborhood. How old the house is and the condition of anything that’s covered in the policy matters.
If you fall in love with one of those old, historic homes with character features, be prepared. Insurance rates are based on replacement values. The cost to replace damage to those features, as well as to old plumbing and other systems, is more expensive. Your rates will reflect it.
The condition of the roof, windows, plumbing, electrical, and HVAC systems also affect rates. Their age and state are major factors in the risk calculation. Upgrading them could lower your rates as well.
4. History
There are two types of your history that insurance companies vying for your business will examine before quoting rates. One is your claims history. The other may be your credit history.
The logic for insurers is simple. If you have a history of making claims, your rates will inevitably be higher than those for someone without that history. That’s because claims cost insurers money, so they’ll hedge their bets.
There are a handful of states that prohibit insurers from using credit history as a factor in insurance rates. In the others, however, that history is fair game. The better your history, the better your rates because the company is betting you will pay your premiums and deductible. With insurance, past behavior is a strong indicator of future performance.
5. Deductible
Deductibles play a couple of key roles in homeowners insurance as well. They ensure that policyholders share responsibility for payment of claims, which might reduce the number of claims they make. They also provide a buffer for insurers when paying catastrophic claims or multiple claims all at once.
There’s a general rule of thumb that higher deductibles result in lower premiums. If you commit to paying more on a claim, the insurer will reduce the cost of the premium you’re also paying. This sounds like a good deal, but you may only be delaying paying for the benefit.
For example, you rarely make claims against your policy but when you do, you pay a high deductible. You may be paying more out of pocket than you would have if your premiums had been higher. Moreover, paying a monthly premium affects your budget less than forking over the entire deductible when you file a claim.
6. Marital Status
Keeping in mind that insurance is a game of risk and numbers, actuaries have studied claims data and analyzed it. As it turns out, married couples make fewer claims than unmarried policyholders. So, you can expect your marital status to make a difference in your homeowners insurance rates.
There are no assurances that just because a couple is married, they won’t make fewer claims than their single neighbor. However, there is a perception that married couples are more stable, responsible, and financially sound than their single counterparts. Couple that with the statistics regarding claim probability and the unmarried pay a premium.
If you’re unmarried, you can ask the insurers what the difference in your premium would be if you were married. It’s likely that it would be negligible and certainly not constitute a reason to tie the knot with someone. But the rules of probability will be in play.
The X Factor
When you’re shopping for homeowners insurance, arm yourself with a little extra knowledge about the factors that will affect your rates. Remember that risk, statistics, and probability affect your quotes, even if you have an excellent history. Now, you’ll at least know what to expect.