How Is Home Insurance Calculated?

Written By Scott Kessman
Last updated August 18, 2021

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August 18, 2021

Simple. Thrifty. Living.

Part of purchasing a new home is getting home insurance, also known as homeowners’ insurance. Just like with car insurance, prices for home insurance will vary from company to company. An insurance company uses a variety of criteria to determine the price you will pay each year. Several factors also make a difference in how home insurance is calculated.

Learn more about how the insurance companies arrive at the price they do so that you can make an informed decision when choosing a company. You’ll also learn about things that can raise or lower your insurance premium and what home insurance covers.

Don’t confuse homeowner’s insurance with a home warranty. A home warranty is an optional coverage plan that typically covers the repairs for appliances, plumbing, electrical, and HVAC systems.

Home insurance is not an option, it is a necessity. Most home insurance plans cover things like theft, damage to your home, and liability for injuries to others on your property. All mortgage companies will require you to have home insurance, but you will get to pick the insurance company.

Different criteria will affect how home insurance is calculated. However, there are other factors that come into play before the insurance companies even start coming up with a price. These include:

The area of the home:

In some areas, premiums will be higher. For example, certain regions experience more harsh weather more often than others. Insurance companies charge more because homeowners in those regions often need to file more claims. You should know that the area you live in might affect the premium.

Losses tallied in the previous year:

Insurance companies are businesses that want to make money. To ensure they make a profit each year, they consider how much they paid out to homeowners the previous year for insurance claims. Based on that, they will start their premiums at a base price to ensure that they can cover the same losses this year while still making a profit. They call this the pure premium.

After arriving at the pure premium, insurance companies will then use a series of formulas and calculations to arrive at the specific premium for your home.

You are not likely to pay the same price for home insurance as your neighbors. Even though you live in the same area, and even if you use the same company, you’ll probably pay a different rate. That’s because many other factors affect the final price for each specific home.


You can often choose the levels of coverage for your home, and this will definitely affect the premium.

They divide the different coverages into six categories:

  • Dwelling — this is the coverage for your home. For example, if a tree fell on your home and you needed a new roof, the damage falls under this coverage.
  • Other structures — same concept as a dwelling, but covering things such as fences, sheds, or pools.
  • Personal property — covers your personal belonging damaged by fire or flood, or stolen by theft.
  • Liability — provides coverage if someone is injured on your property.
  • Medical payments — pays for the necessary treatment of someone injured on your property. This might even cover medical expenses if you or a pet injure someone else in another location. They refer to this as off-premises liability.
  • Additional living expenses — covers the cost of living somewhere else temporarily if you need to vacate the home due to damage or ongoing restoration.

Choosing the amount of coverage you need will lower or raise the cost of your homeowner’s insurance premium. You can also choose deductibles which will further affect the cost. The higher the deductible, the more your premium will go down.

Other things that determine how home insurance is calculated will include the size of the home, the age of the home, and the condition of major components such as the roof. Additions to the home that aren’t attached to the main dwelling, can increase coverage. For example, a pool or deck will require more liability coverage.

Home Location

The home’s location to the local fire department can also play a role in determining the cost. Likewise, close proximity to the coast or a home in a flood plain can also affect the premium. Smoke alarms, burglar alarms, and other security systems can help to lower your premium.

When choosing a home insurance company and getting a quote, you can make things a bit simpler by choosing one of the common three levels of coverage. These include:

Actual Cash Value

In the event of a disaster that destroys the home, such as a fire, this covers the cost of the house and your belongings. They factor the depreciation of your belongings into the actual cash value.

Replacement Value

This is similar to the actual cash value but does not deduct depreciation. The idea of acquiring this coverage is that it covers you to rebuild or replace your possessions up to their original value.

Guaranteed Replacement Value

This is the most comprehensive and most expensive option for coverage. When you have this coverage, you are covered for whatever it costs to rebuild your home or replace your possessions beyond the value of your policy limit. However, there might still be a maximum allowance past the policy limit, such as 20%.

Although this will cost more than other types of coverage, experts recommend it. That’s because your home will likely cost more to rebuild in the future due to fluctuating prices.

Additional Coverages

There are other options you can add that will also determine how is home insurance calculated. For example, you might want to add earthquake insurance, sewer and drain coverage, or others depending on where you live.

Essentially, it all comes down to risk — the risk an insurance company perceives as the possibility they will need to pay a claim on your home. The more claims within a certain area, the more expensive your insurance premiums will be. Be sure to get quotes from different companies and read the coverage details so you know exactly what they cover and for how much.

Other Ways to Save

And, you can still find additional ways to save. Look into combining purchasing your homeowner’s insurance policy from the same company you have car insurance from. Insurance companies often grant a multi-policy discount.

About the Author

Scott Kessman

I possess a strong 20-year background in marketing, digital marketing, and advertising. However, writing has always been a true passion of mine, and after working in corporate offices for many years, I turned my passion for writing into a full-time job. As a contract content writer for the last 12 years, I can craft engaging and informative content about a wide variety of subjects. I have also written and published two fantasy novels and a collection of short stories.

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