Home Insurance Rating Factors

How do insurance companies set rates for your homeowners policy?   

Home insurance companies use information about your home, where you live, and your own background to determine how much you will pay in annual premiums. Underwriters at your insurance company will consider these factors when putting your policy together. If you are curious about your homeowners insurance rates, have a look at the guide below to learn more about some of the individual rating factors or visit our in-depth guide to average homeowners insurance rates. 

Home insurance rating factors — table of contents:

1. Your policy
2. Your home
3. Your background
4. Considerations

Your policy

The type of policy type that you choose greatly informs the rates that you will pay. A more robust open-peril policy — like an HO-5 policy form — will likely set you back more than a bare-bones policy that only covers the most basic perils. 

Below are the common policy forms offered by most homeowners insurance companies: 

Amount of coverage

The amount of coverage that you need is directly tied to a number of factors, including how much it costs to rebuild your home, the value of your personal belongings, and the amount of liability coverage that you need. Have a look at the coverage types that come standard in most home policies and how they can affect your insurance rates. 

• Dwelling coverage: This is what pays to fix or replace your home. You should at least carry an amount equal to the value that your insurer assigns to your home. Some insurers may offer an option to increase this limit above your home’s value to account for inflation and the rising costs of labor, though you will have to pay an increased premium. 
• Other structures coverage: Other structures on your property (such as an unattached garage or workshop) are typically covered up to 10% of your dwelling limit. If these structures would require more than what that limit provides, overall dwelling limits may have to be raised. 
• Property coverage: Your personal property coverage is usually equal to half of your dwelling coverage. However, some items that you own may be particularly valuable, such as jewelry, fine art, and other collectibles. For these items, an insurance company usually allows you the option to add scheduled property coverage that protects certain higher-value items.  
• Loss of use coverage: If your home is unable to be lived in, this coverage covers things such as accommodations, transportation, and food costs. The limits of this coverage are typically about 20-30% of your dwelling coverage. 
• Increased liability limits: Your personal liability insurance protects you from liability claims both at home and away. Most companies allow these limits to be raised for an added premium to offer you even more protection. 
• Medical Payments: Also referred to as “med pay,” this coverage goes toward covering the costs of injuries or property damage that occur on your property. The limits of this coverage typically start around $1,000 per occurrence, but can usually be increased for an additional premium. 

Other policy options

• Endorsements: Sometimes referred to as “riders”, endorsements are add-ons that can help to provide extra coverage in special circumstances. Common homeowners endorsements include sewer backup, water damage and home business coverage.
• Bundling: Choosing to get your home and auto insurance through the same company could also affect your rates. Many insurance companies provide an option that allows you to combine these policies and receive a cheaper rate. 
• Discounts: Many home insurance companies offer policy discounts that can help you save on your premiums. Popular home insurance discounts include paying your yearly premium in full, living in a gated community, or installing smart home features such as leak detection systems. 
• Actual cash value or replacement cost value: Most standard policies cover your primary dwelling at replacement cost, but your personal belongings might be covered at actual cash value, which factors in depreciation when assigning a dollar value to your belongings. If, for instance, your couch is covered at actual cash value, you would not receive a payout large enough to cover the cost of a brand new couch of the same type. To receive a larger sum, you would need to cover your belongings at replacement cost, which could increase your rates. 

Your home

While the cost to rebuild your home is a very important determinant of your insurance premiums, insurers consider a number of other factors, including the style of the home and its condition. Review potential rating factors below. 

Age of your home's systems

While the actual age of your home isn't a rating factor, insurers can rate you on the age of your home's plumbing, electric or HVAC systems. Older home systems tend to have more issues than newer ones. This can make them more expensive to insure, as things like out-of-date plumbing or wiring can wreak havoc on your home. For these reasons, insurance companies tend to favor newer homes or homes that have been recently updated.  

Building materials

If your home is constructed of expensive or otherwise hard-to-find building materials, you can expect the cost to replace the house to be reflected in your home insurance premiums. This is especially apparent in older craftsman style homes where many of the features are handcrafted or one-of-a-kind. The cost to repair or replace these features is often prohibitively expensive in today’s marketplace. 

Neighborhood

The neighborhood that you live in can have an impact on your premiums. If your neighborhood suffers from frequent property crime, this can drive up your rates. Improving your home security with fencing, deadbolts, and security systems can work toward reducing this amount. 

Roof condition

Your roof takes a beating from the elements. Over time, exposure to sun and harsh weather conditions can weaken it, increasing the chance forleaks. If your insurance company sees your older or worn-down roof as a risk, that will be reflected in what you pay for home insurance. 

Attractive nuisances

Some of the things that make your home more enjoyable to you can also increase your insurance costs. Swimming pools, trampolines, or certain yard features can increase the likelihood of unwanted guests sneaking onto your property and potentially injuring themselves, putting you at risk for liability claims. Having these "attractive nuisances" will almost certainly lead to higher insurance costs.

Deductible

The deductible is the amount of money that you are responsible for before the insurance company will cover a claim. A higher deductible can lead to lower insurance premiums, as you are assuming a greater portion of the risk. 

Where you live

If your home is in an area prone to natural disasters such as hurricanes, earthquakes, or wildfires, you will likely face higher insurance premiums. Keep in mind that standard insurance policies don’t often safeguard against perils like flooding, so it’s crucial to make sure that your insurance coverage is sufficient to protect your home. You may need to seek out a separate earthquake or flood insurance policy to be properly covered. 

Fire safeguards 

How close your home is to a fire station or even a fire hydrant can greatly impact how much you pay for homeowners insurance. Those who live in more remote areas or greater distances from the nearest fire department will likely see higher premiums. Also, installing further measures for fire protection such as a sprinkler system or smoke detectors might help to bring down these costs. 

Your background

Finally, insurance companies look closely at your own background when determining your rates. Whether you are a long-time homeowner or are just taking your first steps toward buying a home, it’s important to know how your personal profile is seen by insurance companies::

Claims history

A homeowner with a long history of making claims is less attractive to most homeowners insurance companies. To safeguard against risk, they will likely increase your premiums if you have made a number of recent claims. 

Credit history

Credit history has long been used by the insurance industry as a rating factor. Oftentimes, studies have shown that those with a higher credit score are less likely to file a claim than those with a poorer credit rating. However, some states may not allow the use of your credit score when putting together your rates. 

Your pets

Certain dog breeds — deemed "aggressive breeds" — may sound alarm bells for insurance companies, especially those with a bite history. Because your personal liability coverage usually covers dog-bites, insurers are less likely to want to insure you (or may upcharge you) if you own a dog assumed to be dangerous.

Employment status

Another factor that can impact how much you pay for car insurance is your job status. For instance, if you are a veteran or on active duty, you may be eligible for special discounts or rates from insurance companies that cater specifically to the military. Furthermore, those who are retired can expect to pay a lower rate than someone who is currently employed. This is because retirees tend to be at home more often, lowering the chance of an incident like theft. Check with your insurance agent to see if your insurer offers job-specific savings. 

Homeowners insurance rate considerations

While some rating factors are outside of your control, having a clearer understanding of how your insurer sets your rates can be helpful when shopping for a homeowners insurance policy. Every insurance company has its own underwriting policy and may weigh certain factors differently. This is why it’s always a good idea to get a number of home insurance quotes so that you can compare prices. The Zebra can help you compare free quotes from a number of top insurance companies.