How is Home Insurance Calculated?

Home insurances are usually expensive, and the calculations for the home insurance premium are also very complex. Many of our readers are interested in knowing how home insurance is calculated. In simple words, several data points are used to calculate home insurance. These data points include the size of the home, construction type, risk factor, claim history, and other such factors. Usually, the insurers would use the loss data or the claim history along with the information on construction costs at a particular zip code to arrive at a number. On this page, you will learn more about calculating home insurance premiums.

Calculation of Home Insurance

While calculating the home insurance premium, the companies use a formula that accounts for pure premium and expense ratio. Pure premium is calculated by the exposure of the insurance company, and the expense ratio is nothing but the operational cost, taxes, profits, and other administrative costs for the company.

How is Home Insurance Calculated?

Factors Impacting Home Insurance Cost

As mentioned earlier, multiple factors impact the cost of home insurance. Some of them are –

  • Age of the home – Older homes have to pay a higher premium
  • Area of the property
  • Claim History of the Zip Code
  • Credit Score of Owner
  • Crime rate in Neighborhood
  • Deadbolt Locks
  • Number of family members staying at the property
  • Personal Claim History
  • Presence of Pets
  • Presence of Fire Alarms
  • Presence of Security Alarms
  • Public Protection Classification
  • Replacement cost of the home
  • Type of construction
  • Type of Roof
  • Miscellaneous Factors (Presence of Pool, Trampoline, Playground Equipment, etc.)

=> Also Read: When Do You Need Home Insurance?

Tips To Lower the Home Insurance Premium

There are multiple ways to lower the home insurance premium. This is something very similar to the car insurance premium. Some steps you can take to reduce your home insurance premium include increasing the deductibles and checking for discounts. In addition, you can buy bundle insurance from the insurer to reduce the cost. Apart from this, the other points that can help you reduce the home insurance premium are –

  • Installing the security system and making the home safer can help you get as much as a 20% discount on the premium. This also includes upgrading the windows, locks, and doors. To keep the premium low, you can use fire-safe materials like masonry and fire retardant asphalt or metal.
  • It is better to insure the home at the replacement cost instead of just using the purchase price. This would significantly reduce the premium of the property.
  • You must also review the Comprehensive Loss Underwriting Exchange Report (CLUE Report) and look at the factors that lead to previous claims. Try to resolve those factors and get the report corrected if they are not already resolved.
  • Review your credit score and personal claim history. If you see an error, get that corrected so you can reduce the premium further.

=> Also Read: Can Home Insurance Be Transferred To a New Owner?

Final Verdict

Home insurances are usually expensive. They can be even higher if you live in an area prone to natural disasters. Moreover, if you are using high-end material at home, then that would push the replacement cost north. This will again increase your home insurance premium. You can review all the factors we have compiled, and we are sure that you will understand the basics behind calculating home insurance. If you have any other questions about this topic, please get in touch with us, and we will be happy to help.


Sumit Kumar Yadav has experience analyzing business and finance of big to small companies. Loan, Insurance, Investment data analysis are his key areas.