Understanding the Average Cost of Homeowners Insurance

Let’s cut right to the chase – the average cost of homeowners insurance nationwide is $1,249 per year (see table under “Your State of Residence” below). But that’s just the average – you may pay more or less.

Insurance companies consider several factors when determining insurance premiums: where you live, the type of home and its value, the coverage options you choose, etc. It means that the average cost of homeowners insurance will be slightly different for every homeowner.

In this guide, we’ll explain the various factors that will impact your cost of homeowners insurance.

What Does Homeowners Insurance Cover?

Homeowners insurance covers the homeowner for damage or loss related to hazards like fire, storm damage, and theft. Though these are the most common hazards, other less frequent events include smoke damage, explosions, damage caused by public disturbances, vandalism, falling objects, the weight of snow or ice on the roof, flooding from internal systems (like plumbing, air-conditioning, hot water heaters, etc.), or even from an electric power surge.

It’s even possible to have coverage for custom features, like a home-based business, high-value artwork, or high-priced jewelry, though these are typically coverage options.

What Does Homeowners Insurance Not Cover

It’s also important to understand what homeowners insurance doesn’t cover.

Two particular examples are damage or destruction from flooding and earthquakes. You’ll need special policies for both flooding and earthquakes for the insurer to cover those hazards.

You should also be aware that homeowners insurance does not cover damage or loss due to owner neglect. For example, if your roof is a decade past needing to be replaced, and it collapses during a snowstorm, the insurance company may not pay the claim. You, as the homeowner, are expected to employ reasonable repair and maintenance to the home to minimize the likelihood of disasters.

Homeowners insurance policies also have specific provisions prohibiting certain usages of the home. For example, standard language prohibits the operation of certain businesses in a home or the storing of hazardous materials. If a claim arises from either, the insurer will pay no benefits.

It also won’t cover damage or loss caused by illegal activities. For example, if a home catches fire because you’re running a meth lab in the garage, your claim will be denied.

It’s essential to fully understand all provisions of any policy you’re considering purchasing.

Is Homeowners Insurance Required?

While there’s no legal requirement to maintain homeowners insurance on your property, it is highly desirable. It’s a relatively small cost to pay to repair or rebuild what is the single biggest asset most people have.

But if you have a mortgage on your home or are applying for financing that the property will secure, the lender will require you to have a homeowners insurance policy in place for the life of the loan. Since your home is the collateral, the insurance will protect its value.

Homeowners Insurance Policy Provisions

There are six types of primary coverage within a standard homeowners insurance policy:

Optional Homeowners Insurance Provisions

Like most insurance policies, you can add policy options to a standard homeowner’s policy.

Flood and earthquake insurance. As discussed earlier, insurance companies won’t cover these hazards within a standard plan. You must purchase a separate policy or policy rider to cover these threats.

Scheduled personal property. Though standard policies provide coverage for personal property, high-dollar value items will need to be listed separately. This is referred to as scheduled. Examples include jewelry, furs, numismatic coins, antiques, artwork, jewelry, and other valuables.

Personal umbrella liability. The standard homeowners insurance personal liability coverage may top out at around $500,000. But you can purchase more – even several million dollars in coverage – by adding this provision to your policy.

Business use of your home. Though certain items, like computers and laptops, may be covered in a standard policy, you’ll need to check your policy limits to be sure it will cover all the office equipment you have. If not, you’ll need to add an optional provision for the additional coverage. Similarly, if you operate a daycare business out of your home, you’ll need to get another provision added that will provide greater liability protection.

Inflation protection. Many insurance companies will include this provision within standard policies. If not, you should request that the company add it to the policy. Inflation protection will provide automatic increases in the amount of coverage based on the rate of inflation. It ensures your home will always be adequately covered even as replacement costs rise.

How Homeowners Insurance Premiums are Determined

Several factors will determine the homeowner’s insurance premium on any home. For that reason, calculating a homeowners insurance premium – much like a car insurance premium – is a true matrix. The only way to develop a reliable figure is to consider each factor that will impact the policy.

The most common factors used to determine a homeowner’s insurance premium are as follows:

Your State of Residence

The first factor affecting homeowners insurance premiums is your state of residence. This is determined mainly by each state’s insurance laws and heavily by the unique risks policies must cover in each. 

For example, Florida and Louisiana have among the highest premiums in the country because of the prevalence of hurricanes. Oklahoma and Texas are also among the highest due to tornadoes.

States with more stable environmental conditions, such as Arizona, Delaware, Idaho, Nevada, Ohio, and Utah, are at the low end of the premium scale.

The average annual homeowners insurance premium is presented in the table below. (The data is from the Insurance Information Institute, based on a 2021 study by the National Association of Insurance Commissioners.)

The Specific Location of the Home

The homeowners insurance premiums presented in the table above are statewide averages. But there can be significant variations within the same state.

For example, coverage for property located in a community close to the ocean – and subject to maritime storms – will be more expensive than a property located further inland in the same state but less affected by the same storms.

Premiums will also vary from one community to another based on the number of claims filed in an area. For example, a dense urban area is more likely to experience damage or destruction due to fires than a suburban or rural area. Premiums will be higher in the urban location as a result.

The Characteristics of the Property

The characteristics of the property can play as significant a role as its location.

Common factors related to the property that affect homeowner’s insurance premiums include:

• The age of the home – older homes have fewer safety features, and are generally more likely to experience fires or storm damage. However, recent renovations can result in lower premiums.
• Special features – if the property has a built-in swimming pool or hot tub, premiums will be higher because these amenities present additional hazards.
• Safety features – fire/smoke alarms can reduce damage done by fire or smoke, while burglar alarms will reduce the likelihood of theft.
• Construction materials – a frame-built house will cost more to insure than a brick house because it’s more prone to fire and storm damage.
• Multiunit homes – these cost more to insure due to the increased risk of personal injury resulting from a higher number of occupants. The policy may also be more expensive if the owner takes in boarders.
• Business use of home – because businesses add an additional level of potential liability, premiums will be higher if you use your home for business. Certain businesses, like repair businesses, will add even higher liability and larger premiums.
• Proximity to a fire hydrant – a home located 300 feet from the nearest hydrant will be more expensive to insure than a house with a hydrant on the front lawn.
• Proximity to the local fire department – the closer you are, the lower your premium will be due to the quicker response to a fire by firefighters.
• The age and composition of the roof – the integrity of the roof affects the ability of the home to withstand storms and other hazards. The newer the roof, and the better the materials used to build it, the lower the premiums will be.
• Fireplace or wood-burning stove – since this increases the risk of a fire in the home, the premium cost will be higher.

Simply put, any feature or use of the property that will increase a hazard risk will also raise the premium cost.

The Value of Your Home

All other factors being equal, it will cost more to insure a higher-priced home than a lower-priced one. However, that doesn’t mean the premium will be twice as high for a $500,000 home as it will be on a $250,000 property.

The Deductible

As is the case of just about every type of insurance policy, homeowners insurance also makes use of deductibles. A deductible is an arrangement in which the first dollar cost will be paid out of your pocket and applied annually. It serves the lower the premium because it reduces the insurance company’s liability, especially with smaller claims.

The lower the deductible, the higher the premium, and vice versa. While the deductible is commonly a flat dollar amount, like $500 or $1,000, it can also be a percentage of the property’s insured value. For example, if the home is valued at $300,000, and the deductible’s 1%, you’ll pay the first $3,000 of any claims filed during the calendar year.

The Coverage Levels Selected

Most homeowners insurance policies will provide for a range of coverage amounts. For example, you may choose personal property coverage of 60% or 70% instead of 50%. You can also choose a higher level of liability coverage. Either increase in coverage will result in a higher premium.

Special policy options will also increase the cost of your policy. If you add a provision for scheduled (high-value) property or business use of your home, the premium will be higher.

Replacement Cost vs. Actual Cash Value (ACV). Most policies will offer you the option to choose one or the other. Replacement cost covers the cost to repair or rebuild your home using materials of comparable quality to its original construction. ACV will fully reimburse you, but your home’s age and level of wear and tear will be considered. Because of the adjustments, ACV is likely to pay less for a claim, though the premium will be lower than that of a replacement cost provision.

The Claims History: In the Community, on the Home, or by You 

Claims history has three parts – the history of claims filed in the community, on the home you own or are purchasing (including those filed by previous owners), and your personal claims history.

The level of claims filed in the community indicates the potential likelihood of a claim being filed against your home. Certain areas may be more prone to storm damage, theft, vandalism, or forest fires, and will cost more to insure.

If the home itself has a history of claims being filed, it could indicate structural problems or other defects in the house itself.

Your claim history will also be considered, just as it is in the case of auto insurance. There’s no getting around it – insurance companies prefer to write policies for people who don’t file claims. If you’ve never filed a claim, you’ll be eligible to get the lowest premium. But if you’ve filed two or three in the past, your premium will likely be adjusted higher.

The Insurance Company You Obtain Coverage From 

The insurance company you choose is one of the single most significant factors affecting the premium you’ll pay for homeowners insurance. The difference in premium can be several hundred dollars per year.

The following are national average annual homeowners insurance premiums from several large insurance companies (source: NerdWallet):

• Allstate, $1,623
• American Family, $2,042
• Farmers, $1,811
• Nationwide, $1,731
• Progressive, $1,722
• State Farm, $1,342
• USAA, $1,528

Notice that the difference in premium between State Farm and the American Family is $700 per year. 

Always get quotes from several different companies to find out who has the lowest premium. Also, make sure the coverage levels between the quotes are the same. Always compare apples to apples. One company may give you a lowball quote by omitting the essential protection that you need.

How to Save Money on Homeowners Insurance

As you can see, homeowners insurance policies are pretty complex. Fortunately, there are several ways you can lower or at least minimize the premium:

• Shop for coverage – getting quotes from several carriers is the best way to ensure the lowest premium.
• Ask for a list of available discounts – insurance companies will give discounts for safety equipment, proximity to a fire hydrant or firehouse, a new or recent roof, and other factors. Apply for every discount possible.
• Bundle home and auto – by getting home and auto insurance with the same company, you stand to get discounts on both policies.
• Maintain the home in good working order – that includes maintaining and replacing components, like the roof, appliances, furnace, water heater, and air conditioner, on a regular basis.
• Buy a newer home – because they incorporate the latest safety features and construction materials, they’re usually cheaper to insure.
• Choose a higher deductible – the higher the deductible, lower the premium. But be sure you have liquid cash available to cover the deductible if a hazard strikes.
• Choose appropriate coverage levels – over-insuring your home or your personal possessions will lead to needlessly high premiums.
• Maintain a good credit score! – this one surprises many consumers, but insurance companies frequently use your credit score as a factor in determining your premium. The higher your credit score, the lower your premium will be. How much depends on the company you apply with.

Final Thoughts

When shopping for homeowner’s insurance, do your best to ensure the policy will adequately cover expected liabilities. It’s a balancing act; underinsure, and you may not be covered when disaster strikes. But over-insure, and you’ll pay for coverage you may never need.