Does the cost of a home affect the cost of home insurance?
If you’re looking to buy a home, you might be wondering whether your purchase price will affect the cost of your home insurance. The answer to this question is a bit of yes and a bit of no. Although the cost of home insurance isn’t directly tied to the cost of a home, it is significantly tied to the value of a home. Oftentimes, the price of a home is not equal to an insurance company’s valuation of the home.
The value of the home
Insurance companies have access to a database of home values. These home values are determined through a variety of factors, including the location of the home, the size of the home, the building materials used and the age of the home. The more valuable your house is determined to be, the more costly the house will be to insure.
A more valuable home is more costly to insure for a variety of reasons. First, there’s the cost of rebuilding. A small, 900 square foot home can be rebuilt for, say, one hundred thousand dollars (remember, the rebuild cost of a house is lower than the cost of buying a new home because you already own the land, minus the cost of clearing the land). On the other hand, a large, 2000 square foot home will be at least twice as expensive to rebuild. Because of the larger replacement cost, insurance rates will be higher.
Depending on your city and the age and size of your home and lot, you might not be able to rebuild your home exactly how it was. In these situations, the insurance company will charge a premium on your policy to cover the difference between your actual home’s value and the cost to rebuild a home as similar to yours as possible, within the confines of the law.
The contents and additional structures
Homeowners insurance does more than just insure the physical structure of your home. In addition to protecting your home from fire and other damage, you are insuring your contents and additional structures.
To determine the value of your contents and additional structures, your insurance company will calculate a percentage of your primary structure’s value. So, if your home is valued at $400,000, your contents might be valued at five per cent of that, or $20,000. If your home is only worth $150,000, your contents will have a value of $7,500.
With the value of your contents and additional structures tied to the value of your home, it’s in your best interest to make sure that your insurance broker reassesses your home value periodically, especially if you live in an area where real estate prices are declining.
Because home insurance policy rates are determined by the value of your home, and because that value is neither equal to your purchase price, nor constant over time, the cost of your home is not entirely related to the cost of your home insurance. That being said, purchasing a small house will yield lower home insurance rates than a large home, but only because the large home will have a great cost to rebuild and will include a higher amount of contents coverage than the small home.