How Do Home Renovations Impact Your Home Insurance Costs?

What Renovations Can Increase Your Insurance Costs?

Standard homeowners insurance includes four basic types of coverage:

1. Liability coverage in case a visitor is hurt on your property
2. Additional living expenses coverage to pay for living elsewhere during home repairs
3. Dwelling coverage that pays to repair or replace the physical structure of your home and any other structures on the property (such as a detached garage)
4. Personal property coverage for your possessions

Remodeling projects can add to your home's value. However, they also make the home costlier to rebuild or repair. (The average home renovation costs $48,025, according to HomeAdvisor.com.) Because you'll need more coverage, your premiums will go up.

Renovations That Can Increase Your Homeowners Insurance Costs

• Building a home extension or addition: The greater the square footage, the more expensive your home is to rebuild.
• Building a detached structure on your property, such as a barn, gazebo or garage
• Adding a basement: In addition to increasing square footage, basements are vulnerable to water damage and flooding, which may increase your premiums.
• Adding water features: A pool, spa or fountain boosts the odds of someone being injured on your property, so you'll need more liability protection. The Insurance Information Institute recommends pool owners raise their home insurance liability limits to between $300,000 and $500,000 or more. Purchasing umbrella insurance, which provides additional coverage beyond the limits of your home insurance policy, may be wise.
• Upgrading materials: Pricier building materials will cost more to repair or replace. Gutting your vintage 1970s kitchen and replacing it with hardwood floors, custom cabinets and high-end appliances is likely to raise your insurance rates, for example.
• Building a chimney or fireplace: These potential hazards increase your risk of fire.

When adding square footage to your home, you'll probably purchase furnishings to fill the new space. You'll need to increase your personal property coverage to cover the cost of replacing them if they're damaged or stolen. Keep receipts for all work done on your home and any new furnishings you purchase during the remodel. Your insurance company may need them to assess your coverage needs.

How much these renovations will increase your premiums depends on the specifics of your home and your policy. Before starting your renovations, talk to your insurance company about your plans. See if the agent can provide a rough estimate of how much your premiums might increase. Your insurer may also have suggestions for adjusting your planned remodel to keep insurance costs down.

What Renovations Can Decrease Your Insurance Costs?

Fortunately, not all home renovations will increase your insurance costs. Home renovations that make your home safer from fire, storms, burglary and other perils can reduce your insurance premiums. Renovations that can lower your premiums include:

• Adding a security system, burglar alarm or deadbolt locks
• Upgrading older plumbing, which reduces the risk of water damage
• Installing a leak detector or water shutoff device
• Installing storm-safe shutters, which protects against hurricanes
• Replacing windows with newer ones less likely to leak or shatter in a storm
• Replacing your roof, which reduces the chance of leaks or damage from a falling tree branch. Some roofs are fire-resistant or protect against hail.
• Upgrading electrical or heating systems, which decreases the risk of fire from older systems
• Installing fire sprinklers or a fire alarm that alerts the local fire station
• Retrofitting your home to protect against earthquake damage

If you're considering any of these renovations, contact your insurance company to see how much they might save you.

What Else Can Affect Your Homeowners Insurance Costs?

When calculating how much you'll pay for homeowners insurance, insurance companies consider a variety of factors, including:

• Your location
• Your home's replacement cost
• The amount and type of coverage
• Your deductible (typically, choosing a higher deductible lowers your premiums, but means you'll pay more when you file a claim)
• The year your home was built
• The condition of your home
• Whether you have a swimming pool or trampoline
• Any safety or security features
• Your credit-based insurance score (if allowed in your state)

You can typically lower your insurance premiums by:

• Buying multiple policies from one insurer, or "bundling": Many people bundle homeowners and auto coverage, for instance.
• Adjusting your coverage: An insurance agent can help you modify coverage levels to reduce costs while still providing adequate protection.
• Getting discounts: Insurance companies often give discounts to retirees, members of certain groups or associations, or customers who haven't filed claims for a certain number of years.
• Shopping around: Compare rates from various insurance companies once every few years to see if you can find a better price.

The Bottom Line

To avoid an unexpected increase in your home insurance costs, consult your insurance company before starting any home remodeling project to see how it may affect your premiums. Home remodeling can be expensive, but maintaining good credit can help keep costs down. A good credit score can make it easier to qualify for home improvement financing options such as a home equity loan, personal loan or home equity line of credit. In states where your credit-based insurance score affects your home insurance premiums, improving your credit can even help lower your insurance costs. The same good financial habits that help boost your regular credit score, such as making on-time payments and keeping credit card balances low, can help raise your credit-based insurance score, too.