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What are the factors that affect home insurance premiums?

What are the factors that affect home insurance premiums?

Home insurance is often mandatory when you get a home loan, to cover you against any damage. The premium you’ll pay for your home insurance is partially based on the likelihood you’ll make a future claim on your policy, as well as  several other factors.

Sum insured

Home insurance rates are affected most directly by the sum insured. This is the maximum amount you can claim on your home insurance policy. The sum insured will be paid after deducting the excess, which is the amount you pay out of your own pocket. 

If you choose a lower sum insured to reduce the premium, it may not provide adequate cover. You could face financial distress later if you need to file a claim and your policy does not include cover for that kind of damage. 

The sum insured should be calculated to cover on your home’s replacement cost and other supplementary expenses in case your home is destroyed or severely damaged. Supplementary expenses include labour and material costs, temporary accommodation, and professional fees for surveyors and architects.

Excess amount

Excess is the amount you pay when you file a claim on your home insurance policy. Most insurers have a standard excess, but you may opt for a higher excess to reduce the premium. Before you choose a higher excess, you must consider your financial situation to ensure you can pay the amount if a future need arises.

In certain circumstances, you may have to pay different applicable excesses. For example, if your home is damaged in an earthquake or flood, the applicable excess may be the higher of the basic amount or the fixed amount payable for a particular event. You can check the product disclosure statement (PDS) for the applicable excesses for various events.

Other factors

Some other factors affecting home insurance premiums include:

  • Property location: If your home is located in areas that are prone to natural disasters like floods, bushfires, or cyclones, your insurance premium is likely to increase.
  • Structure and age of the property: Insurers consider the age of the property, construction materials used, and the home’s sturdiness to withstand damages to determine the insurance premium.
  • Occupancy: If your home is let out or is vacant for long periods, insurers may charge a higher premium on the insurance policy.
  • Security: When you reduce the risk of theft in your home by installing alarm systems or adding deadbolts to the windows and doors, the insurance premium will most likely be lower.

General market conditions

Certain conditions that affect the home insurance premium are beyond your control. For example, insurers may hike the premium when severe climatic conditions occur. Properties located along the coastal areas are more likely to be damaged due to storms or floods, and your home insurance premium may increase due to the higher risks.

The home insurance premium is also affected by labour, materials, and construction costs. As these costs increase, replacement expenses are also higher, and insurers will have to pay more towards potential claims. The increased financial demand for insurance companies results in higher premiums.

How do claims affect insurance premium?

Does a house insurance claim result in a premium increase? A short answer is ‘maybe’. Insurers must safeguard themselves against unnecessary claims to avoid financial stress. To prevent such instances, insurers may increase the premium in case of a claim.

There are multiple reasons why home insurance premiums increase. Some of these, like general market conditions, are not within your control. You can consult an experienced broker to find an affordable home insurance policy that offers the maximum benefits.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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