How is the cost of home insurance calculated?

Shopping for home insurance can be confusing. You think your home is pretty basic, but the insurance rates you’ve been quoted might not be clear when you first see them. Use this primer on how to calculate home insurance premiums to see which aspects of your home dictate your premiums, and by how much.

Replacement cost

Home insurance policies are almost always rated for the price it would cost to rebuild the home, if it were to be damaged to the point where you couldn’t live in it anymore. The higher that cost, the higher the premium. The value never includes the cost of the land, as that will not affect the replacement cost.

This approach leaves some surprised, as an older home that may not reflect modern tastes would likely cost as much to rebuild as a totally modern home. Features such as crown mouldings, custom windows, and built-in cabinets also drive up the cost to replace a dwelling, which will ultimately increase the cost of the insurance.

Many people mistake replacement cost for resale price, but they’re very different. A home purchased in the countryside or the outskirts of town wouldn’t cost as much if the exact same building were purchased in a downtown core, for example.  It’s easy to forget while buying a home and figuring out how to calculate home insurance premiums, but you also pay for the land where the house sits, not just the house itself!

How to calculate the replacement cost of your home for insurance purposes

Start with an estimate from the construction company that made it, if you can find it.

You can often get this number directly from the insurer as a part of the quote (we provide it early in the quote process), but you may want a second opinion. With recent homes you may be able to contact the commercial real estate developer who built it in the first place, but that’s not feasible for most home owners.

We’d recommend getting an independent home reconstruction appraisal from a contractor if you want a second opinion. You can expect that appraiser to pay attention to these factors while inspecting your home:

  1. Age
  2. Building Codes
  3. Recent Renovations
  4. Custom Windows
  5. Cleanup Costs (after storms or disasters)
  6. Contents Coverage
  7. Foundation quality
  8. Roof Condition
  9. Water Damage
  10. Electrical Fixtures and Wiring
  11. Plumbing and Pipes
  12. Heating and Cooling Systems
  13. Solar Panels (or alternative energy sources)
  14. Presence of Pets

Just remember that replacement cost is not the same as the market value price. Insurance companies are covering the cost to replace your home, not to reimburse you for your market purchase.


Location plays a huge role in deciding your home insurance rate after the replacement cost. However, it’s important to understand how insurance companies take it into account! There’s a lot more to it than simply choosing a house in a nice neighbourhood.

Expect these factors to come into play when insurers look at the location of your home:

  1. How many claims tend to be made in your area.
  2. Crime rates in your area.
  3. Susceptibility to natural hazards, such as tornadoes, earthquakes, and floods.
  4. Distance from the nearest fire hydrant.
  5. Distance from the nearest fire hall.
  6. If your house sits in a flood plain.

Fire protection

One of the most important factors in figuring out how to calculate home insurance premiums is how likely it is that fire will cause serious damage. For example, a home close to a fire hydrant and a few kilometers from a professional fire hall is more likely to survive a fire than one out in the country without a fire hydrant.

Insurance rates will reflect the difference in fire protection. Since the time it takes firefighters to arrive at a burning home is critical, fire alarms that are monitored reduce the cost of insuring your home. The closer it’s monitored, the faster the fire department can contain the damage, mitigating the chance of serious damage.

Other protection

Anything a homeowner does to prevent damage or loss will usually lower the cost of insurance. This includes:

  1. Installing security systems and burglar alarms.
  2. Installing gas and water sensors.
  3. Joining a neighbourhood watch group.
  4. Fixing old or unsafe electrical wiring.
  5. Reinforcing windows against impact.

There are other factors that are considered when establishing how to calculate home insurance premiums, but location, water protection, fire protection, and the cost to rebuild are generally the largest factors at play.

If you’re in the market to upgrade your insurance coverage and experience, you’re always welcome to check out our prices for your home online or call us and we’ll be glad to help you experience our vision of the future of insurance.

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