Home insurance premiums explained

How are insurance premiums determined? 


When it is talked about insurance, you may have heard of the term “premium”. You may think of premium as the compensation you receive from an insurance company for suffered damages, but that’s not true. Instead, by definition, the annual cost of your insurance policy is the premium itself.

The amount of a premium is overall decided on a simple basic concept: the likelihood of the insured individual to file a claim, which in turn depends on the estimated global risk for each homeowner’s situation. If for instance, your house is situated near a fire station or has an extinguisher easily accessible, your risk will be considered lower, then the cost of your policy, aka the premium will be cheaper.

Besides this, insurance companies have to face costs related to their business, and in order to stay alive and have a positive balance they calculate a cost for your policy, that is reasonable both for them and you.

Objective factors are taken into account, as government taxes and territorial fees: these can contribute greatly to the final price. There are also subjective factors for the insurer, that are purely commercial, to which he has to stick. The risk-benefit ratio must be somewhat favorable: if he considers your risk to be too high, you may even be not offered any premium!

While you can’t take steps to modify those variables, there are still many factors that will influence your premium where you can come into play: types and levels (amount) of coverage for each type are what directly determines how much you will pay.

Simply stated, the higher the amount of dwelling coverage, as well as of personal property, liability coverage, additional living expenses, plus extras such as floaters and/or various add-ons, the higher the premium will be. Moreover, it will change over time: every year you are going to renew the policy, it is likely that you will find the costs to have risen a bit, even if your previous conditions of subscribing haven’t seemingly changed.

Before you think this is just business for the insurers, always consider that the main factor deciding the premium is how risk is evaluated in a timespan and in the context of where you are living. Why exactly those changes take place? Here are the most relevant reasons: inflation and changing taxes, investment returns and business-related costs, a new quote of your individual risk, above all after a claim, or the occurring of a natural calamity in your State; number, and type of claims.

That said, you can make the point of reducing that risk, in order to lower the cost of policy; ask the insurer if and how your personal situation has modified when you have to renew the payment.

A relevant parameter is your credit score, which refers to your payment history: remember to check it over time. If for whatever reason it has dropped, you will be considered at more overall risk, then you will be charged accordingly more.

Here are the most important factors for your premium amount:


  • the geographical location of your house (proneness to severe weather)
  • size, age and construction materials, roof quality and integrity
  • type and number of coverages chosen
  • amount of coverages
  • risk exposure on your property (presence of a swimming pool, aggressive pets, etc.)
  • fire and theft preparedness
  • previous claims, both yours and other people’s in your State and neighborhood
  • credit score.

Other things that will be mixing up:

  • bundling with other types of insurance (car, life)
  • conditions for discounts
  • contingent excess coverage
  • add-ons.


Is it better to pay insurance monthly or yearly?


Typically, your premium paid upfront for a year will cost slightly less compared to adding the single monthly installments.

In 2020, the national annual average premium is roughly $1,450. You may choose to have peace of mind paying in advance, rather than be bothered by monthly installments. Also, even if you pay monthly you still have to settle up for the year, whether you make a claim or not at a certain point in the period.

The choice must also be made if you are paying your home insurance separately, or included in the mortgage payment. In short, it is more of a short vs long-term issue: if you have resources, the annual option is the best choice for you and most homeowners.


How do you manage your premium?


There are a few ways you can directly manipulate your policy rates:

  • increasing deductibles. The tradeoff here is that choosing a higher amount means you’re disposed to take the higher risk to pay more if any damage occurred
  •  mitigating your hazard risk: installing security appliances, like alarms and locks for theft prevention; being equipped with fire-retardant materials or extinguishers; reinforcing roofing and walls against major leaks from hail, etc.
  • seeking for discount eligibility: bundling home with car insurance, for instance
  • improving your credit score if it is fair or poor, aka below 669 (it takes time)
  • paying yearly, which will make you save.