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How Insurance Companies Determine Home Insurance Premiums
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Article 2 of 9 in How to Purchase Home Insurance
Home Insurance premium rates are calculated based on pooled risk. All the people in the same pool (or group) pay their home insurance premiums to a big pot. In exchange, the people expect the insurance company to pay their claims from this big pot of money. The insurance company's hope is that they will collect enough money and pay only a few claims in order to make a profit after business expenses. So, the less risky the customers, the less money needed in the pot, and the lower the home insurance premiums are.
You have some degree of control over what level of risk you pose. You can make your home safe from damage and stay away from behavior that will cause your home insurance cost to increase. However, you don't always have control over your level of risk. An increase in natural disasters like tornadoes, hurricanes and earthquakes can raise the average cost increase of homeowners insurance in your area. The continual increase in the price of building materials and labor all have to be absorbed by the insurance company and are ultimately reflected in your homeowners insurance premiums.
TIP: Minimize the risks that you can manage, and keep your home insurance premiums as low as possible!
Calculating your Homeowners Insurance Premium
To help determine who should be allow in the pool (or who would be a good risk), an actuary sets a number of criteria for the underwriter. Those criteria help to weed out bad risks and help to determine the amount of homeowners insurance premium to charge. Each company has its own underwriting standards or criteria, which means one company can reject your application while another might accept it.
To arrive at the home insurance premium rate, the companies calculate the expected losses that will be incurred for a particular group, the administrative and marketing costs associated with producing the insurance, and factor in cash reserves to protect against major catastrophes. The result is the home insurance premium rate for each member of the group. If by chance more natural disasters happen or unexpected losses were greater than calculated, a deficit from the money pool can occur. To make up for that deficit, you will get a home insurance premium rate increase.
Changing your Homeowners Insurance Premium
Changing or improving some of the risk used to calculate your homeowners insurance premium could mean a lower premium and saving money! Review some of the factors below and see if changing a few will make a difference in your homeowners insurance premium.
- Where You live. Premiums are generally higher in areas with a high incidence of storms (tornados in the mid west), fires and earthquakes (like in California) or coastal areas (such as Florida and the Gulf Coast). Homes with access to good fire protection services-like a local fire department and a fire hydrant close by, for example-- get better rates.
- Your claims and credit history also affect your rates. If you have filed claims in the past, your premium is likely to be higher. Learn how to calculate the value of your claim and self insure the small claims to avoid tarnishing your claim free history. Companies may also consider your credit score when deciding what to charge. If you have had financial troubles or are having a hard time paying your bills, you may be unable to maintain repairs or upkeep on a home, possibly leading to damage or possible claims. Maintain or improve your credit.
- Location, Location, Location. Let's face it, some neighborhoods are more crime ridden than others, especially in urban areas. The local crime rate factors in to actuaries calculation of the possibility of a claim due to theft or burglary. But what if you live in a rural area with minimal crime? Then the possibility of a crime or disaster going undetected may be an issue. If the next closest house to you is a half mile away, the chance of anyone noticing even if strangers were breaking in or a fire was leaping out of your roof is slim. So even if your neighborhood is not crime ridden, but too isolated, it could cost you. If you are trying to determine between two homes to purchase, get a quote for the homeowners insurance premium on both. Location could make a huge difference.
- Age, Type and Quality of Your Home. Type of construction, age of the home (with age comes wear and tear and possible claims) and quality of construction all factor into your home insurance premium rate. Whether your home and other structures are made of wood, stucco siding, brick, concrete, or steel frame construction can factor into burn rate in case of fire or the ability to withstand high winds in a storm. Homeowners insurance premiums depend largely upon your home and how much it would cost to replace it if it was seriously damaged or destroyed. As a result, premiums are higher for a luxury home with high-end fixtures and materials that would be costly to replace. If your personal property is expensive as well-if you have antiques, coin collections, precious jewelry-your premium will increase. Amount of coverage - the more you insure, the more it will affect the price of the insurance.
- Deductible. This is the amount that you pay out-of-pocket for each claim before the insurance company will "foot the bill" for payment of a claim. The higher your deductible (or the more you self insure), the lower your homeowners insurance premium. Consider a higher deductible.
- Riders. Any extra home insurance riders you choose to increase your coverage options will make a difference in your homeowners insurance premium. Riders that include things like replacement cost instead of actual cash value or adding valuable items insurance will put the insurance company on the hook for more and therefore, your homeowners insurance premium will reflect this added coverage. Make sure the extra coverage is necessary and that the extra premium is worth the coverage.
Paying Your Homeowners Insurance Premium
There are a couple of ways to pay your homeowners insurance premium. Most people choose to pay their premiums through their mortgage payments. The payments are generally held in escrow and forwarded to the insurer. Including your payment in your mortgage is optional and you can decide to pay the insurance premium separately if you choose. You may make one payment (in which case you may get a discount), or pay quarterly or monthly payments.
TIP: Always keep in mind that missed homeowners insurance premium payments could be an opportunity for the insurance company to cancel, especially if you are a bad risk-too many claims in the past, bad credit, etc. Make the most convenience choice to pay your homeowners insurance premium. Note it on a calendar or set a reminder in your cell phone.