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Homeowners insurance is $1,428 per year on average for a $250,000 dwelling, according to Bankrate’s data. But this cost will vary significantly depending on a number of factors including where you live, the type and amount of coverage you hold and the condition and age of your home. To better understand how much you can expect to pay in premiums, it’s beneficial to know how homeowners insurance is calculated. Once you know the factors that insurance companies consider when calculating insurance cost, you can estimate homeowners insurance costs and budget appropriately.
How to estimate 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 insurance companies when they are determining your cost of home insurance.
To best calculate your home insurance cost, you will need to gather information about your home and belongings. This information will help you estimate your rebuild cost and the approximate value of your personal property. It is also important to understand your financial portfolio and your insurance risks to help determine the liability limit you may need to carry on 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 your home’s rebuild cost. This figure determines your dwelling coverage amount, which is the limit your insurance company will pay to repair or rebuild your home after a covered claim. The rebuild value is just one factor that will impact your home insurance rates, but it’s important since your dwelling coverage also helps determine the other coverage limits on your policy.
Your home’s rebuild value is not the same as its market value. A home’s market value includes the land and is influenced by outside factors, like supply and demand. When you determine your rebuild value, the dwelling coverage is determined based on how much it would cost to rebuild or repair your home, which considers labor costs and the cost of materials.
The cost to rebuild your home depends on several criteria, including:
- Your home’s age
- Total square footage
- Age and type of heating, electrical and plumbing systems
- Building materials
- The foundation type
- Its roof type and materials
- Any unique or custom building features or characteristics
Insurance companies input these details in their valuation tools to calculate the home’s replacement cost. Since each company has its own proprietary rating algorithm, the calculated amount can vary by insurer, but it is the amount the insurer will base the dwelling coverage amount on. Knowing your home’s characteristics and providing these details to an insurance agent or company will help you accurately determine the cost of rebuilding your home’s structure.
2. Estimate the value of your assets
Next is estimating the value of your assets. The personal liability coverage on your home insurance policy may cover costs if you are sued or held legally liable for another person’s injuries or property damage. Liability claims may include:
- Dog bites
- Trampoline injuries
- Pool injuries
- Someone injuring themselves in your yard or home
- Someone in your household damaging someone else’s property
To determine your personal liability needs, calculate your total assets. This means all properties you own, possessions and vehicles. Most insurance companies have a cap on personal liability coverage, possibly up to $1 million. However, some high-value home insurers may offer higher liability amounts. If your assets exceed a company’s personal liability coverage, it may be worthwhile to buy umbrella insurance, which kicks in if you exhaust the underlying liability limits on your home and auto policy.
3. Estimate the value of your personal property
Personal property coverage covers your belongings inside your home and provides limited coverage for items stored away from your home, like in a storage unit. Estimating the total value of your items can help you replace them should you experience a significant loss. Personal property coverage extends to your electronics, clothes, furniture, kitchen and bathroom items, as well as high-value items like artwork and jewelry. However, most insurance companies have limits on high-value items, so depending on each item’s value, you may be better off with a scheduled personal property rider or separate policy to cover those belongings.
You may find it easier to create a home inventory to estimate the value of your belongings. A home inventory can also be an invaluable tool when filing a claim. You should also consider whether you want replacement cost on your belongings or actual cash value, which factors in depreciation.
4. Determine how much coverage you need
Now that you have all your values for your home insurance cost estimate, it’s time to determine how much home insurance coverage you need. If you want replacement cost, your policy should reflect at least the minimum values you determined for your home and personal property, and make sure you’ve added the replacement cost endorsements to your policy or that this coverage is included.
- Dwelling: Pays to repair or replace the structure of the home.
- Other structures: Covers detached structures on your property, such as a fence, garage, driveway or treehouse. Other structures coverage is typically 10 percent of the dwelling amount.
- Personal property: Pays to replace or repair your belongings, usually 50 to 75 percent of the dwelling coverage amount.
- Personal liability: Covers legal expenses if you are held legally responsible for someone else’s injuries or property damage, plus their medical expenses.
- Loss of use: Also called additional living expenses, this coverage pays for increased living costs, 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 dwelling coverage, but some insurers have a time limit rather than 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 still want to help cover their medical costs.
Consider additional coverage, whether through a separate policy or an endorsement, for more robust coverage. These additional coverage types vary by insurer and may be optional in some cases. However, some homeowners may require additional coverage depending on where they live. For example, you may be required to purchase flood insurance if you buy 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 coverage like this, even if they’re not required to help financially protect you should the worst happen.
Endorsements and separate policies can include:
- Earthquake coverage
- Water and sewer backup
- Flood insurance
- Sewer lines
- Windstorm coverage (in high-risk areas)
- Sinkhole coverage
- Identity theft
Insurers use a formula to calculate homeowners insurance
There is no standard formula to calculate homeowners insurance. Each company uses a proprietary underwriting algorithm that weighs your underwriting characteristics differently (your ZIP code, loss history and roof age, for example). Your rebuilding cost is only one piece of the puzzle.
That said, home insurance quotes vary from company to company. Perhaps the best way to estimate your homeowners insurance cost is to compare home insurance quotes from multiple carriers (making sure to request the same or similar coverage levels across the board).
If you’re struggling to estimate your rebuild cost (and thus, how much dwelling coverage to quote), you may want to research average home building costs in your area, with the goal of finding the estimate to rebuild a home per square foot. Once you know the average home rebuild cost in your area, you can multiply this figure by the square footage of your home.
For instance, let’s say you spoke with several local contracting companies and found that, on average, the home rebuilding cost in your area is $200 per square foot. Your home is 1,200 square feet large. To calculate the approximate cost of rebuilding your home, you could use the following formula:
($200) x (1,200 sq. feet) = $240,000 approximate home rebuild cost
If you recently purchased a home or are in the market to buy a house, you may also use the appraisal to help estimate the dwelling value. While this information can help give you a baseline of how much dwelling coverage to quote, property insurers use their own valuation tool to calculate the actual total of your home’s dwelling amount and annual premium.
Estimates of average home insurance costs
Carrying the proper amount of dwelling coverage based on your home’s rebuild cost is essential to ensure you’re paying an accurate (and competitive) rate.
In the table below, we’ve compiled average premiums from analytics company Quadrant Information Services for some of the most common dwelling coverage limits available for standard home insurance policies. However, the overall cost of your homeowners policy depends on much more than just your dwelling coverage. Your personal rating factors will come into play, too. As such, you could be paying more or less than the averages below.
|Dwelling coverage limit||Average annual cost|
Frequently asked questions
How much coverage a homeowner needs depends on their home’s age, square footage and other characteristics. Since it plays a key role in the cost of labor and materials, inflation can also play a key role in your dwelling coverage limit. Once the home’s estimated rebuild amount is determined, other coverage types (such as other structures and personal property) will be based on a percentage of that coverage amount. Knowing the details of your home can help your insurer accurately calculate your coverage and home insurance cost.
The 80 percent rule in homeowners insurance means that you must insure your home for at least 80 percent of the replacement cost for an insurer to cover the damages. If the home is insured for less than 80 percent, the carrier may only cover a percentage of the claim, opening you up to the risk of paying significant costs out of pocket. Consider how homeowners insurance calculations for your property work out in order to determine the cost to replace 80 percent of your home.
There are many factors that determine the cost of homeowners insurance. The state you live in, your credit-based insurance score (in most states) and claims history are factors insurers may use to determine costs. Home characteristics, such as the age, square footage, roof age, building materials and overall condition, also factor into the total cost.
The amount of homeowners insurance that you need will depend on a number of factors, including how much you can afford to cover out of pocket and what the cost of repair would be in case of significant damage. A simple formula for determining an estimate of the amount of coverage that you will need is to take the square footage of your home and multiply it by the per-square-foot building costs in your area to reflect the current cost of construction.