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How Is Homeowners Insurance Calculated?

Table of Contents

Homeowners insurance reimburses you for damage to your home and possessions. It also provides liability coverage to protect you if guests are injured on your property. If you’re making payments on your home, your lender will likely require you to maintain an active home insurance policy. Even if you own your home outright, home insurance is a valuable investment. It will pay for the cost of replacing your home and possessions in the event of a disaster.

Whether you’re in the process of purchasing a new home or recently received your annual policy update, you may be wondering how the cost of your premiums is calculated. It’s a fair question and an important one when you’re comparing rates. Calculating the cost of homeowner’s insurance is a complex process that takes many factors into consideration. This guide explains the factors that are used and the process used by agents to calculate your homeowner’s insurance premiums.

The Insurance Process

The average annual cost for homeowners insurance in Massachusetts with a dwelling coverage of $250,000 is $1,274, which is about $106 per month. There are several variables that could make your premiums cheaper or more expensive than average. When calculating a base cost for home insurance, insurers determine the percentage of the recent cost of losses in the area and the overhead costs generated by the company. The profit made by the company is also a part of the equation. Since insurance is such a competitive industry, companies must carefully calculate the amount that is likely to be needed for claims without overpricing policies. Underpricing policies leave insurance companies without the funds to pay claims that arise. Overpricing means the company will likely lose customers to competitors.

Factors That Affect Your Individual Homeowners Insurance Cost

Your homeowners insurance is designed to cover the cost of replacement for your home and your possessions in the event of a complete loss. It also supplies liability coverage to cover the cost of a lawsuit or medical bills related to an injury that occurs on your property. This means that the building cost of your home and the level of risk on your property must be taken into consideration. To determine these variables, insurance professionals include the following factors when determining your insurance premiums.

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Where you live plays an important role in the risk factors associated with your property. For instance, homes in neighborhoods with high crime rates, frequent flooding, hurricane zones, or other natural disasters are likely to have higher premiums. The population density of your city and even your proximity to the local fire department or fire hydrant can play a part in your risk level.

Calculating insurance

Type of Insurance Policy

Home insurance is typically divided into two coverage types. Replacement cost value covers the cost of replacing your home and possessions. The actual cash value covers the cost you paid for your home and possessions you have insured. Since it’s common for building costs and the costs of expensive possessions like appliances and furniture to increase, it’s generally recommended that homeowners get replacement coverage.


Your deductible is the amount you pay out of pocket before your insurance begins to pay on the amount filed in your claim. Paying a higher deductible usually means lower premiums. However, it’s important not to set your deductible too high. Your deductible should be an amount you’ll actually be able to pay in the event of a disaster.

Size of Your Home

The cost of replacing your home in the event of a total loss is basically composed of the building materials and labor that goes into building your home. The square footage of your home will be a direct factor in the cost of your home insurance premiums.

Coverage Amount

To calculate the amount of home insurance you need, you need to know the value of your home and your possessions. By determining the cost of rebuilding your home and replacing your possessions, you can decide how much coverage you need. For example, if your dwelling coverage is $250,000 and you insure expensive jewelry, electronics, and art pieces, your premiums will be more expensive than your neighbor with coverage on a $150,000 home and few expensive possessions.

Unusual Risk Factors

Your home and the property surrounding your home are an important part of your lifestyle. However, certain features of your property can lead to additional risks. Swimming pools, hot tubs, and trampolines are additions that are likely to raise your home risk levels because guests are more likely to get injured using these features. Your pets can even play a factor in your coverage levels if you have exotic pets or dangerous dog breeds.

Credit Score

While this isn’t always a direct factor in your cost, your credit score represents your likelihood of paying your premiums. Therefore, some insurance companies might charge lower premiums for homeowners with high credit scores.

Claim History

While it’s true that filing a claim might make your insurance go up, your claim history over a long period of time provides your insurer with important information. Homeowners with a history of frequent claims are considered more likely to file a claim. However, other factors are also researched, like the number of claims filed in your ZIP code, to consider local events that might have played a factor.

Determining how much each individual pays for home insurance is a complex process with many variables. Yet, it’s no secret that shopping around can help you save money on insurance. If you’re not sure about how much home insurance you need or how much you should be paying for coverage, it’s a good idea to talk to a local independent insurance agent. Local agents who have been working in the area for a long period of time understand the unique risks of your location. As an independent insurer, the agent can also help you compare prices and find the best coverage to fit your lifestyle. To learn more about homeowner’s insurance in Massachusetts, contact the independent agents at LoPriore Insurance today.

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