How Are Homeowners Insurance Rates Determined?
Last updated November 2019
The cost of your insurance policy depends not only on the coverage you select, but also on a number of other factors, some of which may surprise you.
Choice of Insurer
Checkbook collected annual premiums for sample policyholders for the companies that write almost all of the homeowners insurance business in Illinois and found that some companies charge twice as much as others for the same coverage. For instance, our family living in suburban Cook County would pay only $739 per year with Progressive, $811 with Auto-Owners, $943 with AAA, or $953 with Pekin, but pay more than $1,400 per year with Ameriprise, Electric, Encompass, Lemonade, or MetLife. Most Chicago area homeowners can save more than $500 a year by switching from their current insurance company to a lower-priced one. Some will save more than $1,000.
Cost to Rebuild Your Home After a Total Loss
Your rates are also largely affected by how much insurance you buy. Get an accurate estimate of your home’s replacement cost, which will be used to determine how much dwelling insurance you need to buy. The replacement value isn’t the same as market value; the latter includes the value of the land and your home’s foundation—two expensive components of your property that don’t need to be insured against wind, fire, etc. Replacement value is an estimate of what it would cost to rebuild your house completely on the land that you own.
To determine replacement cost, most insurance companies rely on estimates obtained from valuation databases and appraisals when you take out your policy. But ultimately it’s up to policyholders to buy the right amount of coverage. If you underinsure, you will not be fully covered in the event of a total loss. If, for example, your home is insured for $400,000 and burns to the ground and it costs $600,000 to rebuild it, the most you will receive from your insurer is $400,000—even if the insurer estimated the too-low replacement cost. On the other hand, if you overinsure you’ll pay for coverage you don’t need and could never make claims on.
In the last few decades, construction costs have risen faster than inflation rates, and many insurance companies and policyholders have done poor jobs keeping replacement costs up to date. Some estimates conclude that over half of U.S. homes are underinsured, by an average of more than 20 percent.
You can buy optional policies to protect against being underinsured, including a guaranteed replacement cost provision, extended dwelling coverage, or an inflation-guard endorsement. Some companies provide these add-ons in their standard coverages for no extra cost.
A more effective approach is to have your home appraised every few years. Although it is ultimately your responsibility to buy enough insurance to fully cover your home, you will be in a better position to argue for proper compensation in the event of a total loss if your home is appraised on a regular basis—especially if the insurer conducts the appraisal. Also promptly report any home improvements. If you add a room, remodel a kitchen, or finish your basement, increase your dwelling coverage accordingly.
Your Credit Rating
In Illinois, insurers use credit scores to help determine premiums. With many companies your credit score influences the rates you’re offered more than anything else: The prices most companies offer customers with poor credit are double what they offer customers with excellent credit—with some companies, the poor-credit penalty more than triples their rates. Many consumer groups—including Checkbook—oppose this, arguing that the scores are not a direct measure of insurance risk and that using them in insurance pricing hurts low-income consumers, whose scores tend to be lower on average. Click here for further discussion.
Because claims can drastically increase your premiums, try to limit the number you make.
The most common result of filing too many claims? Your insurer may refuse to renew your policy. You will have trouble finding another reasonably priced insurer that will agree to write you a new policy, and when you find one you’ll be considered a high-risk customer and charged high premiums. In a worst-case scenario, you can’t find an insurer and are forced to obtain coverage with the state’s FAIR [Fair Access to Insurance Requirements] plan, which is likely to charge higher premiums than even the most expensive private insurers.
Even if your claims history doesn’t cause your insurer to drop your policy, making claims will probably raise your premium. Some insurers offer steep discounts to customers who have not made any claims during a two-to-five-year period. Others simply increase rates for policyholders who make claims.
Where You Live
Insurance companies divide areas into territories and assign rates based on the losses companies experience in each one and factors like the quality of police and fire departments, crime statistics, and general level of maintenance of the housing stock. These factors affect prices substantially from territory to territory in the Chicago area.
Proximity and Quality of Fire Protection
Within territories, companies set rates according to the property’s proximity to a fire station and a fire hydrant, and on the quality of the fire department and water supply for firefighting. Rates are usually much lower for homes in “protected” areas within five miles of a fire station and within 500 to 1,000 feet of a fire hydrant. Premiums for homeowners insurance in unprotected areas are typically 40 to 60 percent higher than in protected areas.
Insurance companies rate houses as frame, masonry, “superior,” or in a similar category of construction. The lowest premiums go to houses in the “superior” category—houses in which all floors, the roof, and all exterior walls are constructed from noncombustible materials like concrete, metal, or gypsum. The masonry construction category includes houses with exterior walls made of a noncombustible material like brick, stone, or adobe but that have floors or roofs made of combustible materials. The most expensive rating is for wood-frame houses, including houses with wood, vinyl, or aluminum siding.
Premiums for superior construction are about 15 percent less than for masonry. At a location with good fire protection, frame construction costs on average eight percent more than masonry construction. At a location with poor fire protection, construction materials matter more because frame houses are more likely to totally burn. In such a location, total premiums are about 20 percent higher for a frame house than for a masonry one.
All homeowners insurance policies include deductibles; your loss must exceed that amount before the insurance company’s coverage takes effect. Most companies apply a standard deductible of $1,000 or $2,000, but some might require you to take a deductible equal to one percent of your dwelling coverage. All companies allow you to raise your deductible above the basic level.
By taking as high a deductible as you can, you reduce your premiums substantially. By moving from a $1,000 deductible to a $2,000 deductible, you’ll on average lower your premiums by about 11 percent.
When you take a high deductible, you’re also less likely to file small claims that spur future premium hikes. Remember, insurance is meant to protect you from losses that you can’t afford to cover yourself. If you buy insurance for small losses, you pay insurance company overhead—sales, administrative, and claims handling costs—to deal with losses you could afford to pay. Determine how big a loss you can incur without unacceptably disrupting your life, and then set your insurance deductible levels accordingly.
Age of Your Home
Most companies offer a premium discount on homes less than 10 years old; some offer discounts on those less than 25 years old. This discount can be 50 percent for brand-new houses, but only 25 percent or so for five-year-old ones, and likely five percent or less for older homes.
If your house was built before 1930, you may need a specialty policy. You’ll pay much higher premiums on places in historic districts, where bylaws usually require exterior damage to be repaired to replicate the original appearance. Also, many insurers won’t write policies in these historic neighborhoods, so you may have to turn to a company that specializes in old or historic homes, like Chubb or Allianz.
If you purchase auto and homeowners insurance from the same company, you might get a discount off your homeowners premium or a lower auto premium. Some insurers will cut both.
Keep in mind that such discounts won’t make a high-priced company a good deal. Click here for our most recent report on auto insurance.
Features of Your Home
Most insurers charge slightly higher premiums if your home has—
- A fireplace or wood-burning stove;
- A pool, tennis court, trampoline, or outdoor hot tub;
- A fully or partially finished basement;
- A garage located beneath a living area;
- An electrical system not updated with a circuit breaker;
- A roof composed of wood shingles;
- A roof over 20 years old; or
- A furnace more than 20 years old.
If You Have a Dog
Most insurers charge higher premiums to homeowners who own a rottweiler, pit bull, or other dog breed that the company believes has a propensity to attack strangers. Most insurers charge higher premiums to homeowners whose dogs have bitten strangers. Some insurers specifically exclude damages caused by dog bites from their liability coverage.
You can get discounts for installing devices to protect your home from burglary and fire. Deadbolt locks, fire and burglar alarms, fire extinguishers, or a combination of these devices will generally save you one or two percent. Bigger discounts—typically an additional five to 10 percent—are available for homes that have alarms that report to a central-station monitoring service. Click here for ratings of home security system installers. The biggest discounts usually go to homes with full sprinkler systems.
Since smoking increases fire risk, most insurers charge slightly higher premiums for households with one or more smokers.