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Photo: iStock
Photo: iStock

Why you shouldn’t under-insure your home

Go for a home insurance policy that's on reinstatement basis, but don't underinsure yourself

Anyone with a vehicle has a motor insurance policy because it's mandatory, but how many people owning a house have home insurance? 

Your house too needs to be insured against natural and other perils. While buying home insurance is important, remember to take adequate cover when buying it.

What is it?

Home insurance packs in fire and other covers. 

Fire insurance covers the structure of the house and its contents from fire and other dangers like storm, floods, lightning and cyclones. A comprehensive policy also insures contents against burglary, and electrical and mechanical breakdowns and offers public liability, personal accident, workmen compensation and alternate rent covers.

Sum insured

Home insurance covers only the construction cost. Consult your broker, insurer or a contractor to arrive at the cost of construction and multiply it with the area of the house to get the sum insured. 

This sum insured works if you opt for a cover on the basis of reinstatement value. Here, you get the full cost of construction. But if you buy a cover on the basis of market value, the insurer will deduct depreciation because of which the sum insured will be lower and so will be the premium.  

Go for a policy that’s on reinstatement basis, but don’t underinsure yourself.

The risk of underinsurance 

When you underinsure, or under-report the value of the asset, the insurer doesn’t pay the full claim amount. That’s because the full value of the asset is not insured. Suppose your house costs 10 lakh, but you take a home cover of 8 lakh only or 80% of the actual cost of the house, the insurer will pay only 80% of the claim amount. For instance, in case of a partial claim of 2 lakh, the insurer will pay only 80% or 1.6 lakh. Which is why taking the right amount of sum insured is important.

Also, review the cover on renewal, and ask your insurer if it allows some leeway. Some insurers, for instance, pardon underinsurance to an extent. You could also look at insurance plans that are based on agreed value. In this case, since the value is agreed at in the beginning, there is no fear of underinsurance. This cover works well for flat owners as they don’t have to wait for reconstruction of the building in case of total damage. They get the agreed value and the ownership of the house is transferred to the insurer.

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