Homeowners insurance costs vary widely across the country, depending on the coverage you need, where you live, and other variables. The national average cost for $250,000 in home coverage is $1,383 per year. Before you start looking for coverage, it can be helpful to know how homeowners insurance is calculated. Understanding how insurance companies calculate coverage may help you find an insurance company that fits your coverage needs while offering a price that fits your budget.
How to Estimate Your Homeowners Insurance
There are several steps insurers take to estimate homeowners insurance rates. Knowing these steps and following them yourself may help you know what details about your home to provide to insurance companies when they determine your cost of home insurance.
To best calculate the cost of your home insurance, you need to collect information about your home and assets. This information will help you estimate your rebuild costs and the estimated value of your personal property. It is also important to understand your financial portfolio and your insurance risks to help determine the limit of liability you may need to continue your property insurance policy.
1. Estimate how much it would cost to rebuild your home
The first step in how homeowners insurance is calculated is to estimate the cost of rebuilding your home. This figure determines your home coverage amount, which is the limit your insurance company will pay to repair or rebuild your home after a covered claim. Rebuild value is only one factor that affects your home insurance rates, but it’s important because your home coverage also helps determine the other coverage limits on your policy.
The rebuild value of your home is not equal to the market value. The market value of a house includes the land and is influenced by external factors such as supply and demand. When you determine your rebuild value, home coverage is determined based on how much it would cost to rebuild or repair your home, taking into account labor and material costs.
The cost of rebuilding your home depends on several criteria, including:
- The age of your house
- Total number of square meters
- Age and type of heating, electrical and plumbing systems
- Construction materials
- The foundation type
- The roof type and materials
- Any unique or modified building features or characteristics
Insurance companies feed this data into their valuation tools to calculate the home’s replacement value. Since each company has its own rating algorithm, the amount calculated may vary by insurer, but it is the amount on which the insurer will base the home coverage amount. Knowing the features of your home and providing this information to an insurance agent or company will help you accurately determine the cost of rebuilding your home.
2. Estimate the value of your possessions
Next is to estimate the value of your assets. The personal liability coverage on your home insurance policy can cover costs if you are sued or found legally liable for someone else’s injury or property damage. Liability claims may include:
- Dogs bite
Swimming pool injuries
- Someone injures themselves in your garden or house
- Someone in your household damages someone else’s property
To determine your personal liability needs, calculate your total assets. This is all the property, assets and vehicles that you own. Most insurance companies have a limit on personal liability coverage, possibly up to $1 million. However, some high-quality home insurance companies may offer higher liability amounts. If your assets exceed a company’s personal liability coverage, it may be worth purchasing umbrella insurance, which kicks in when you exhaust the underlying liability limits on your home and car policy.
3. Estimate the value of your personal property
Personal property coverage covers your belongings in your home and provides limited coverage for items stored outside your home, such as in a storage unit. By estimating the total value of your items, you can replace them if you experience a significant loss. Personal property coverage extends to your electronics, clothing, furniture, kitchen and bathroom items, as well as high value items such as artwork and jewelry. However, most insurance companies have limits on valuable items, so depending on the value of each item, you may be better off with a scheduled personal property driver or a separate policy to cover those belongings.
You may find it easier to do a home inventory to estimate the value of your belongings. The home inventory can also be an invaluable tool when filing a claim. You should also consider whether you want replacement costs for your assets or actual cash value, which plays a role in depreciation.
4. Determine how much coverage you need
Now that you have all of your values for your home insurance cost estimate, it’s time to determine how much home insurance coverage you need. If you want replacement costs, your policy should reflect at least the minimum values you’ve set for your home and personal property, and make sure you’ve added the replacement cost notes to your policy or that this coverage is included.
- Accommodation: Pays to repair or replace the structure of the home.
- Other structures: Insures free-standing structures on your property, such as a fence, garage, driveway or tree house. Coverage from other structures is typically 10 percent of the home amount.
- Personal property: Pays to replace or repair your belongings, usually 50 to 75 percent of the home’s coverage amount.
- Personal liability: Covers legal costs if you are held legally responsible for someone else’s injury or property damage, plus their medical costs.
- Loss of use: Also known as additional living expenses, this coverage pays for higher living expenses, including food, laundry, and lodging, if your home is temporarily uninhabitable after a covered loss. Loss of use coverage is usually 20 to 30 percent of your home coverage, but some insurers have a time limit instead of a percentage limit.
- Medical Payments: Pays up to a certain dollar amount for medical expenses if a guest is injured on your property. In these cases, you are not legally liable for their injuries, but you still want to help cover their medical expenses.
Consider additional coverage, through a separate policy or endorsement, for more robust coverage. These additional coverage types vary by insurer and may be optional in some cases. However, some homeowners may need additional coverage depending on where they live. For example, you must purchase flood insurance if you purchase a home in certain flood locations. In these cases, considering the cost of flood coverage should be a factor in estimating your home insurance costs, as your mortgage lender may require you to carry this coverage. However, it may be worth considering adding such coverage, even if it’s not mandatory to protect you financially should the worst happen.
Recommendations and separate policies can include:
Insurers use a formula to calculate homeowners insurance
There is no standard formula to calculate homeowners insurance. If you recently bought a home or are in the market to buy a home, you can use the appraisal to estimate the home value.
You can also research local housing costs in your area, which will provide an up-to-date estimate of the cost per square foot. You can then multiply the average cost per square foot by the square footage of your home to determine your home’s coverage. However, the home insurer will use its own valuation tool to calculate the actual home insurance cover amount. Once the home amount is determined, the home policy quote will consider many remaining coverage types based on the percentage of the home amount.