Home Insurance Premium Factors & FAQs

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  • Homeowners Insurance

When you own a home you invest a lot in it, maybe all you have in your lifetime. You may not like to imagine that any damage could break your castle. But disasters or accidents can happen uncalled for, and that is when home insurance could come to your rescue. It gives you financial and liability protection and helps to get back to your original position. Such an emotionally stressful time could be a real eye opener or those who opted not to have home insurance.  The cost that you pay for your peace of mind by having insurance is your premiums.

What Does Homeowners Insurance Premium Mean

Homeowner’s insurance premium is the agreed payment that the policyholder must pay to the insurer. When you sign your insurance contract then you agree to pay a set amount of premiums for protection against specified perils. The insurance company earns their income from your premiums and makes them liable to provide you coverage for your policy claims. The premiums vary with each person and many risk factors are considered for calculation. The insurance companies perform an analysis of how likely it is for you to file a home insurance claim. If you fail to pay your premiums then it may lapse your insurance policy and they may cancel your contract. This would negatively affect your insurance record and you may find getting coverage difficult.

How Home Insurance Premiums Are Calculated

There are many criteria that insurance companies consider to calculate your home insurance premiums. They estimate the chances that you may file a claim for a given peril or situation and the cost of paying out for that claim. Finished basements are used for living, recreational purposes or entertainment and may be furnished with equipment. The more expensive your basement, furniture, and other fittings, the higher would be your premiums. It is important to inform your insurer if you upgrade your basement later.

Factors used for calculating home insurance premiums

  1. Location of your home: Your postal code tells a lot about the type of risks in your area and the past claims for that location. Claims made by your neighbors may also show a pattern of the claims and the chances that you may claim too. For example, an area with many break-ins or theft may be a major factor that affects your premiums.
  2. Proximity to fire station and fire hydrant: The nearer you live to emergency fire services the cheaper will be your premiums.
  3. Rebuilding cost of your home: Your premiums also depend on how expensive it is to rebuild your home and replace contents. The outbuildings, garages, basement etc. are considered along with additional living expenses. Any upgrades or renovation may increase its value and your premiums.
  4. Age: This refers to the age of the building, roof and the policyholder. The older the building the more are the chances of having a roof or foundation problem. With age, the wear and tear also increase and poor upkeep may cause damages too. When you age then you may not be as proactive in maintaining your homes that may increase the risks for damage.
  5. Heating systems: The sources of heating and use of a wood stove or wood electricity may also affect your premiums. For example, oil heating may be more expensive as there is an increased risk of leaks. It is more hazardous when compared to electric heating or using an air gas furnace. Wood stoves if old and deteriorated may easily cause house fires and carbon monoxide pollution.
  6. Electrical system: If your electrical wiring and systems are outdated they pose a high risk for fire damage and that could raise your premiums. Using fuses may be costlier than breakers for risk of overloading and fire hazards.

How Are Homeowners Insurance Premiums Determined

Home insurance companies look at many factors when they determine how much would be the premiums for a home insurance policy.

  • Building: The location, age, type, construction materials, special conditions are all considered.
  • Location: Your insurance company also notes the emergency fire services in your neighborhood such as the distance from fire stations and hydrants. Any risk factors in your home location such as for theft, tornadoes, and vandalism etc. are considered.
  • Claims experience: Any past claims play a vital role in determining your premiums.
  • Policy coverage and limits: The type of policy, level of coverage, limits, deductibles, endorsements etc. determine your premiums.
  • Property value: The replacement cost of your home and contents in case they are destroyed also may affect your premiums.
  • Credit profile: Your credit history may be checked by most insurers to gauge your risk profile while determining premiums.

Is Home Insurance Mandatory In Canada

No. It is not mandatory to get home insurance in Canada. However, if you are not buying your house outright and need financing it may be different. Your mortgage lender or bank may insist that you get home insurance. Most often they may not allow closing of your mortgage without home insurance.

Is Home Insurance Worth It

One of the major financial investments that Canadians make is when they decide to own a home. Most often, it could be your biggest equity. However, whether your home is old or new, it is prone to various risks and perils that could destroy it. You may wonder whether paying home insurance premiums every month is really worth it. If you cannot afford to rebuild your home or replace your contents then home insurance may be the only solace. Sometimes, homeowners cringe when they pay insurance premiums every year and never make a claim. But when disaster strikes and destroys your home if you have coverage, then it would help you to get back to normal. If you cannot live without your home then you might as well buy insurance for your peace of mind.

How Much Home Insurance Do I Need

The amount of home insurance that you may need varies as per your living situation and your home condition amongst several other factors.

  • Get home insurance for the cost of rebuilding your home and not purchase or market value. You may get an accurate estimate for replacing your home in case it is completely destroyed due to severe weather.
  • Update and keep your home contents inventory and adjust your coverage when you renew the policy every year. If you have high-value items then get special endorsements to cover them.
  • You may also estimate any additional living expenses you may need in case your home becomes unfit to live due to damage.
  • Liability protection for third-party damages is also an important coverage. The more coverage limit you could afford, the better.

What Affects Homeowners Insurance Premiums

Woodstoves

The following factors may affect your home insurance premiums:

Structural Criteria

  • Electricity & heating: The electrical wiring and heating sources used in your home also affect your premiums. For example, if you have aluminum wiring then it may be a risk for fire damage. They may want to reduce any overloading risk.
  • Pipes: Lead or galvanized pipes are older and easily crack or leak so insurers may not prefer plumbing with those. Plastic or upgrade copper plumbing will reduce your premiums.
  • Woodstoves: These pose a fire hazard and carbon monoxide pollution if poorly maintained and installed.
  • Roof age: The age, condition and construction material used in your roof may concern insurers too. Some insurers may pay only 25% of the depreciated value of replacing your roof if they are too old.
  • Home business or alterations: When you make significant changes to the building structure that could affect premiums. You may have to purchase a separate policy or endorsement when you conduct a business from your home.
  • Security systems: You may inform your insurer if you have installed any burglar or smoke alarms for your home’s safety.
  • Rebuilding cost: The property type, size, value and the contents are the most vital factors that affect your insurance premiums. Your insurer may also consider the construction materials used, the age of the building and many other criteria.

Other Factors

  • Location: Your insurance provider tracks the type, the cost, and frequency of claims in your neighborhood. This helps them to estimate how likely it could be for you to file a claim.
  • Distance from emergency services: If you have fire stations and fire hydrants near your home then do inform your insurer. This would help to reduce the risk concern for any fire damage as it is a peril that can completely destroy your home.
  • Claims history: Any past claims that you may have filed would also impact your premiums.

Are Homeowners Insurance Premiums Negotiable

Most often it may not be possible to negotiate much on your home insurance premiums. You may try to raise your deductibles or tweak your coverage limits for a better price. Another option would be to shop around for multiple quotes for comparable features and benefits. When you sit down with your insurance agent or broker then you may highlight positive aspects of your home and negotiate a fair deal.

Reasons Why Your Home Insurance May Be Going Up

When your policy premiums increase at renewal without any claims, then you may be curious to know the cause. There could be many reasons for your insurer to increase your rates.

  • Risky home design or structure: Shoddy plumbing, wood stoves, old appliances, poor wiring, winding unsteady staircases etc. could be some of the concerns to increase your premiums.
  • Home business: If you conduct a home business then your liability risk increases and that may impact your premiums. There is likely more contents and merchandise in your home that could possibly get stolen or destroyed.
  • High-value items: When you notify your insurer about a luxury item then an increase to your premiums should not surprise you. Or you may purchase a separate policy rider.
  • Neighborhood changes/claims: Any increase in the frequency and nature of claims in your neighborhood could affect your premiums too. Theft claims in your neighborhood could hike your premiums even though there was none at your home.
  • Additional structures: If you have a swimming pool, tree house, trampoline etc. then it may be a risk factor for falls and mishaps. So, while it is fun to have such upgrades, your insurer may not be amused and could hike your rates.

Does Home Insurance Premium Increase After Claim

When you make a claim on your home insurance it may impact your premiums. Sometimes if you have a claims-free discount on your policy and you make a claim then, you may lose that discount. This would increase your premiums. Very often home insurance providers may hike your premiums by 15% – 20% after you make a claim. Some may even raise your premiums by as much as 30% – 50% as per your profile and frequency of claims. Usually, an insurer does not expect more than 2 claims in a decade for a property. So, whether a few claims over a certain period of time or many small claims in the same year, your premiums could increase.

How To Lower Your Homeowners Insurance Premium

When you have decided to purchase home insurance then you may want to try and lower your premiums. A few tips could help to bring your insurance premiums down.

  • Make it a point to thoroughly review your home insurance coverage and limits frequently and not just at renewal. Check if you have adequate insurance or you are overpaying for any coverage that you do not need.
  • Do a comparison of your home replacement value with your insurance coverage. If you have downsized or made any safety upgrades then inform your insurer. Installing burglar alarms and security systems could get you discounts due to better safety. Check with your insurer as to what are the approved specifications for the safety systems.
  • An increase to your deductibles may help to lower your premiums. Do this as per your affordability in the event of a claim. You may not want to have a $5000 deductible and then be unable to afford that when you claim.
  • Bundle your home and car insurance from the same provider as it could give you a discount.

How Often Are Homeowners Insurance Premiums Paid Monthly Or Yearly

When you buy home insurance then you may be given an option to pay your premiums monthly or annually. Which is better? Well, paying your premiums monthly may spread your cost and you do not make one big payment. However, when you pay monthly then it might turn out to be more expensive than paying annually. When you pay annually then you do not have to worry until your renewal or a switch. On a monthly payment schedule, you may pay a deposit at first which is followed by 11 payments. You may also pay an interest charge when you pay your premiums monthly. Some insurers may not have a monthly payment option and you may miss out on a good deal when you compare.

When Should Home Insurance Start

When you are buying your property outright then it is up to you to decide about your home insurance coverage start date. You may delay it due to financial concerns and then purchase later when you can afford. But, if there are any damages to your home in the meantime then it may be a very tough situation if your insurance was not active. You may have to pocket all the expenses as disasters may happen without any warnings. If you borrow money to buy your home then your mortgage lender or bank may insist that you pay for an annual home insurance policy. They may need this before finishing the closing formalities for your home.

Should I Get Home Insurance Before Closing

If you are not buying your home with a mortgage then you may technically not need to get insurance before your deal is closed. But if you have a mortgage for your home then they may need home insurance before they approve your mortgage. You may have to give them proof of insurance since they hold a lien to your property until you pay them off. So, to safeguard their interest in your property, your mortgage provider may want your home insured against any losses or damages. Most often they may ask for an annual home insurance to finish closing the deal and disburse your mortgage.

Are Home Insurance Settlements Taxable

Typically when your home insurance is settled then you do not owe any taxes on that settlement. The whole concept of home insurance is based on indemnity. This means that you purchase insurance to restore you to your original condition prior to the loss. You may not earn an income or profit when you claim on your home insurance. The proceeds of your claim help you to recover the losses and replace or rebuild your home. While an insurance claim settlement is not taxable, if you use it for investment then you may have to pay taxes as you gain profit.

Are Home Insurance Claims Tax Deductible

Usually, home insurance claims are not tax deductible in Canada. Insurance claims are not a source of profit or income and are meant only for your protection against losses. When your claim is approved you get compensation for your losses and it does not improve your financial condition. If your claim was for an insured peril then it is up to you on how you may use the money from your claim but you do not owe taxes.


Resources:

http://www.ibc.ca/on/home/buying-home-insurance/premiums

http://www.ibc.ca/on/home/buying-home-insurance/


 

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