How much does insurance cost? That is the golden question and that’s the question that generates billions of dollars of ads every year to people like you, who are trying to find the cheapest insurance.
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So how much does insurance cost and is there a way to easily calculate the cost of your insurance?
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How Do Insurance Companies Determine My Insurance Rate?
Remember, insurance is a numbers game. It’s not just random prices that these insurance companies are throwing at you. You pay into a pool. Everyone pays into a pool and that pool is there to help you if you’re the one that needs to file a claim on your home or auto policy. So your money may actually be going to help the guy down the road who’s a horrible driver or the other person down the other way whose house burned down.
It’s not always your money going back to you, but it’s going into that pool, which helps other people when they need it. But that pool only works if there’s more money going into it then out of it, and so that’s something that insurance companies have to look at when they’re determining how much your insurance is going to cost.
The insurance company is constantly looking at these numbers and adjusting rates. It’s not just a one time set it and forget it, but they are constantly looking at the numbers to make sure they’re charging enough or not too much. If they don’t have enough money in that pool, well you can guess, they’re going to raise rates.
If they do have enough money in that pool, excess money in that pool, well then that gives them the opportunity to lower rates and to attract more clients to that specific company.
Why Don’t Insurance Companies Charge The Same?
This is why different insurance companies have different rates from each other. It’s why not every single insurance company has the exact same rates. One insurance company, by the luck of the draw, may have had a really great year. Their clients didn’t have a lot of claims. They have excess money. They are able then to lower their rates and again, attract more customers.
Then another insurance company, again by the luck of the draw, had a horrible year. All their clients’ homes burned down. All their clients wrecked their cars. So they in turn need to raise rates to be able to have sufficient money in that pool to be able to pay for all of those claims.
As I mentioned before, insurance companies use data, lots of data, to be able to predict and set rates accordingly. If they are good at looking at the data and trying to predict what happens, then you don’t have a lot of ups and downs. You don’t have a lot of roller coasters. The good insurance companies that have good people looking at the data, their rates over time look more steady, either steadily up or steadily down, which is good for everybody because you don’t get these huge jumps up or down at your renewal.
If you have some insurance companies that, for whatever reason, interpret the data incorrectly, or look at the wrong data, then you are going to see a bunch of spikes and drops in the premiums from year to year.
What Do Insurance Companies Use To Determine Your Rate/Premium?
So let’s talk about some of that data that the insurance companies use so that you can be aware what goes into calculating your insurance costs for both your auto and your home insurance policies.
Prior Claims
The first thing is prior claims. This one is pretty self-explanatory. If you have prior accidents, if you have prior speeding tickets, if you have prior things happening to your home, well, the insurance company’s going to look at that and they’re going to see historically from the data, people who have more prior claims are probably going to have claims in the future. So they’re going to rate your policy appropriately with the mindset that, “Hey, this guy’s probably going to have another claim. We’re probably going to have to take money out of that pool and give it to this guy. So we need to charge him a little bit more to account for that.”
Driving Record
The second thing, and this is kind of like I just talked about, is your driving record. If you have a DUI, if you have speeding tickets, if you have suspended licenses, things to that nature, again, the data shows you’re probably going to have an accident. You’re probably going to take money from that pool and cost the insurance company money.
Type Of Vehicle
The third thing is the type of vehicle. Do you have an expensive vehicle, a big vehicle, a small vehicle? Do you use your vehicle for work? Things to that nature. Certain cars cost more to repair than other cars and some cars, if you look at the data, are more likely to be stolen than other vehicles. So the insurance company will use that data and rate your policy accordingly.
Your Age
The next thing is your age. Whether you agree with it or disagree with it, your age, looking at the data, has an impact on how many accidents you’re going to get into, or how many accidents you’re likely to get into. When you’re younger, you’re inexperienced, you’re probably going to get in more accidents. Then this is the part people really don’t like to hear. When you get older, your mind doesn’t work as fast as it used to. The data shows that the older you get, the more likely you are to get in an accident. So again, the insurance company will rate according to your age.
Credit
The next one, and you probably really won’t like this one, is your credit. Like I said, insurance companies don’t just pull this stuff out of thin air. They look at the data and the data shows the better your credit score, the less likely you are to get in an accident. So like it or not, that’s what the insurance company uses to help determine the rate of your car insurance.
Location Of Your Home
The next piece of data the insurance company uses is the location of your home. Guys, these insurance companies are getting very, very specific as to how much they rate. What I mean by that is you can live right here and then you move across the street or you move two streets down and your rate could completely change. That’s how granular they are getting. They look at data like how likely your home is to flood, how likely your home is to get a hailstorm in that location, how likely it is for somebody to break into your home. All of those things are based off of the location of your home and the insurance companies use that data accordingly.
Age of Your Home
The next thing, and this is pretty self-explanatory, is the age of your home. A brand new home, not so likely to have so many problems, not so likely to have the roof ripped off or the shingles ripped off by the wind. So the newer your home, most likely the cheaper the premium is going to be. If we go into more detail with that, the characteristics of the home. Again, the age of the home, the size of the home, one or two stories, do you have a basement, what type of roof do you have, do you have tile, do you have carpet? Do you have wooden floors? Do you have a trampoline? Do you have a dog? All of these things can cause claims, can cause accidents that the insurance company has to pay out for and so they’re going to take all of these things into consideration when calculating your home insurance rate.
Cost of Building Materials
Then the last piece of data that we’ll look at is the cost of building materials. Right now, it’s the beginning of 2022. We know the cost of building materials is skyrocketing. It keeps going up and up and up. The insurance companies have to look at that because when you have a claim on your home, whether it’s partially damaged or the whole thing is damaged, burnt to the ground or knocked to the ground, well, they have to take these building materials to rebuild or replace your home. If cost of materials are higher, the insurance company’s going to have to pay more money. So they look at this and they raise rates to be able to make up for that increase in the cost of building materials.
Insurance Companies Use Data To Determine Your Premium!
So those are just some of the pieces of data that the insurance company uses. They use hundreds and hundreds of pieces of data to rate your specific policy. Now it’s important to realize that some of these data points may not pertain to you. You may say, :Hey, I’m middle aged, never had an accident. Live in a brand new home, blah, blah, blah.” You’re the perfect insurance candidate. But remember, it’s not all about you. It’s about the pool that you are in. So you may be the perfect driver and by the way, everybody I talk to is always the perfect driver. I’ve never met a bad driver. So you may be the perfect driver, but you are paying for everybody else that is not the perfect driver. You may have the perfect home and you’re the best maintenance person. You fix your home, and it’s up to date and nothing’s ever going to happen to it. Well, that’s great. So your premiums are going to pay for everybody else who doesn’t do that.
That’s how insurance works and believe me, if you’ve never used it, once you do have to use your insurance, you will be happy that you’ve been paying into that pool your entire life, because you will want to get to your home or car replaced if you ever need to.
So the answer to the question, can I easily calculate my home or car insurance?
The answer is no. There are so many rating factors. So many data points as we discussed. The best way to find a true and accurate rate is simply to call a broker.
Brokers work with a number of different companies. They can take all of that data from you, plug it into their system and find the best rate. But remember, like we always talk about, it’s not just about price. It’s about getting the right coverage for your specific situation. So although price is important, no one wants to pay more than they need to, make sure when you’re talking with a broker that you go over all the details, all the data points in your life so that they can accurately get you the best coverage for your specific situation.