Q

What is a homeowners insurance premium?

A

You pay a homeowners insurance premium to your insurer to keep your policy in force and your home covered. Read on to learn more about how your premiums are calculated and different ways to pay.

If you have insurance on your home, you pay a homeowners insurance premium every so often to keep your policy in force and ensure your home and personal property stay covered. Your homeowners insurance premium is generally paid in one of two ways: either directly to the insurance company with one-time or recurring payments; or as part of your monthly mortgage payments.

Unlike health insurance, which involves premiums, deductibles, copays, and other out-of-pocket expenses, the cost of homeowners insurance is a little more cut and dry — you pay premiums to keep your coverage active and a policy deductible on insurance claims. If you stop paying your premiums, you’ll typically have 30 days to pay down the balance before your homeowners policy lapses, or is canceled. If you’re struggling to pay premiums because of COVID-19–related financial hardship, reach out to your homeowners insurance company — many are offering payment plans to affected customers or no-fee policy reinstatements if your policy lapsed.

Like auto and life insurance, your homeowners insurance premiums are calculated based on how risky it is to insure you — you’ll pay higher premiums if your insurer thinks you’re likely to file frequent claims. Your homeowners insurance rates are determined by how much coverage is in your policy; the location, size, build and age of your home; your deductible amount; and your credit score, among other things.

Key Takeaways

  • Your homeowners insurance premium is the amount you pay to keep your home insurance policy active

  • There are a number of factors that impact your premium — namely your level of coverage, deductible amount, home characteristics, and credit score

  • Most insurance companies offer discounts on your premiums, like if you fortify your home with safety features, bundle your home and auto policy, or pay your premiums in-full

  • The average annual homeowners insurance premium in the U.S. is $1,249, according to the NAIC

How your homeowners insurance premium is calculated

There are a number of factors that determine how much you pay in premiums — some of these factors you can control, some you can’t. Understanding how your insurance company sets its rates will go a long way in helping you understand your bill and potentially getting your premium down.

1. Your coverage amounts

Your homeowners insurance cost is directly correlated with how much coverage you have for your home — generally speaking, the higher your limits and more robust your coverage is, the higher your premiums will be. For example, if your home has replacement cost personal property claim reimbursement terms, a number of additional coverages, high personal liability coverage limits, and high limits of liability for expensive valuables, you’re going to pay more than you would if you were insured by a standard policy with basic coverage.

2. Your home’s location

One of the biggest indicators of insurance cost is the location of your home. If your home is in a wildfire, tornado or tropical storm-prone area, it is generally going to have higher premiums than if it is in an area with a relatively milder climate.

3. The size, age, and build of your home

If you live in a 5,000-square-foot home, your homeowners insurance rate is probably going to be higher than a 2,500-square-foot home simply because larger homes cost more to rebuild, so you’ll need higher dwelling coverage limits.The age and build of your home also play a role in how your rates are determined. Older homes are generally viewed as riskier to insure — build materials for the frame, foundation, plumbing, and wiring may be obsolete and are more likely to incur losses than modern builds.

However, just because a home is old, that doesn’t necessarily mean that it poses more risk than a new home. Ultimately, the home’s risk depends on how it’s built. Sure, your home may be new, but if it’s constructed with a timber frame and you happen to live in the middle of Tornado Alley, its chances of being destroyed are probably greater than your next-door neighbor’s concrete home that’s fitted with a bomb shelter.

3. Your insurance score

Another factor that determines your homeowners insurance premiums is your insurance score, or your credit-based insurance score. Your insurance score is a calculation of some (but not all) factors in your credit history as a way to measure how likely you are to file a claim. The higher your credit score is, the lower your homeowners insurance premium will be.

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Why your homeowners insurance rates changed

About 30–40 days prior to the end of your homeowners insurance policy term, your insurance company will send you a policy renewal form, giving you the option to continue your coverage with a new term. At that time, you’ll look over any changes to your coverage and your insurance premium. You may notice your policy premium went up or down — we’ll go over why that may have happened.

What increases your home insurance rates

If you’ve never filed a claim or you’ve only filed weather-related claims, your insurer might not penalize you with a higher rate. But if you’ve filed multiple claims, or you had a  loss caused by theft, fire, or interior issues like plumbing or bad wiring, you may see higher rates on your next bill.

You may also see higher rates if you live in a state or region that just experienced a costly storm or natural disaster, even if you weren’t directly impacted by the destruction. Natural disasters that cause the insurance industry major losses can affect premiums across the country, even if you live miles from the damage.

What decreases your home insurance rates

If your premiums went down, that may be because you renovated an older section of your home that was basically an insurance claim waiting to happen, or maybe you took advantage of some of your insurance company’s discount opportunities. If you outfit your home with one or more of the following features, let your insurance company know — you may see a sizable discount at renewal.

  • Smoke alarms

  • Burglar alarms

  • New roof

  • Deadbolts on doors

  • Fire extinguishers

  • Storm-proofing your windows, doors, and roof

You should also look into bundling your home and auto insurance if it’s offered by your insurer. Getting multiple policies through the same insurance company can lower your premiums by as much as 20%.

Your other option is to simply go with a higher deductible, which is probably the most immediate and easiest way to lower your rates. Just be mindful that a higher deductible means more out-of-pocket expenses if something bad happens.

What’s the average homeowners insurance premium in each state?

Homeowners insurance premiums differ from state-to-state for a number of reasons. If a state has a lot of big cities and densely populated areas, premiums may be higher, as home values are generally higher. States in areas with a higher incidence of natural disasters also generally have higher premiums than states that don’t. The average annual homeowners insurance premium in the U.S. is $1,249, [35] but some states’ average rates are either lower or higher than the national average.

StateAverage annual premiumStateAverage annual premium
Alabama$1,409Montana$1,237
Alaska$984Nebraska$1,569
Arizona$843Nevada$776
Arkansas$1,419New Hampshire$984
California$1,073New Jersey$1,209
Colorado$1,616New Mexico$1,075
Connecticut$1,494New York$1,321
Delaware$873North Carolina$1,103
District of Columbia$1,264North Dakota$1,293
Florida$1,960Ohio$874
Georgia$1,313Oklahoma$1,944
Hawaii$1,140Oregon$706
Idaho$772Pennsylvania$943
Illinois$1,103Rhode Island$1,630
Indiana$1,030South Carolina$1,284
Iowa$987South Dakota$1,280
Kansas$1,617Tennessee$1,232
Kentucky$1,152Texas$1,955
Louisiana$1,987Utah$730
Maine$905Vermont$935
Maryland$1,071Virginia$1,026
Massachusetts$1,543Washington$881
Michigan$981West Virginia$970
Minnesota$1,400Wisconsin$814
Mississippi$1,578Wyoming$1,187
Missouri$1,383

How to pay homeowners insurance premiums

When you take out a mortgage on a home and your down payment is less than 20% of the home's sale price, your lender may require that you escrow your property taxes and home insurance premium with your mortgage payments. That means that every month when you make a mortgage payment, a portion goes into your escrow account to pay for insurance and taxes.

You may also have the option of paying for homeowners insurance directly, without an escrow account. This could be because your mortgage company didn’t require you to open an escrow account, or maybe you dropped your escrow account because you noticed your lender was routinely misprojecting insurance and taxes and overcharging you. If you do pay your premiums directly, you can typically pay the following ways:

  • Automatic charge to your debit or credit card

  • One-time charge to your debit or credit card

  • Bank account withdrawal

  • Mailing a check

  • At your insurance company’s local office

Most insurers will give you the option of paying your premiums month-to-month, albeit at a slightly inflated price. Paying your premiums for the year in full usually gets you a solid discount.

What happens if you don’t pay your premiums?

If you don’t pay your premiums, your insurance company is required to give you and your lender a grace period of 30 days before your policy is canceled and you lose coverage. If that happens, you’ll have what is referred to as a lapse in coverage.

If you can’t afford insurance or you have a long claims history and can’t find a company that will insure you, you may be eligible to purchase a Fair Access to Insurance Requirements (FAIR) plan to avoid a coverage lapse. FAIR plans are policies that are offered to high-risk applicants who can’t find insurance anywhere else. These plans also cost significantly more than private plans, so this should truly be a last-resort option.

Since homeowners insurance is required by lenders, they’re typically listed as an additional insured party on your policy, so they’ll also receive a cancellation notice if you don’t pay your premiums. If you don’t act fast enough, your mortgage company may buy insurance for you. 

If your coverage is going to lapse soon or you don’t have enough coverage to cover at least the mortgage on the property, your lender will impose lender-placed insurance (also known as creditor-placed and forced-placed insurance) on the home. Similar to FAIR plans, lender-placed insurance is generally more expensive than the insurance you had before and should be avoided.

FAQs

How are companies handling missed premium payments due to COVID-19?

If the spread of COVID-19 has impacted your job or business and you’re struggling to pay your homeowners insurance premium, talk to your insurer. Many insurance companies are providing their hardest hit customers a break with grace periods for missed payments or payment plan options. You should contact your insurance company to learn if they are offering any assistance for financial hardships due to COVID-19.

How much is a homeowners insurance premium?

The average cost of homeowners insurance is $1,249 as of 2018, which comes out to about $104 a month. The cost of your homeowners insurance will depend on a variety of factors, like how much coverage you need, what ZIP code you live in, your home’s age and building materials, as well as your credit score, claims history, and more.

Is it better to pay homeowners insurance monthly or yearly?

It’s generally cheaper to pay your premiums annually at the start of your policy term — most insurance companies will offer a decent discount if you pay your premiums in-full every year. You do however have the option of paying them month-to-month, but it will cost you slightly more over time.