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Home / Money / Calculators /  DYK: Market value and reinstatement value in home insurance

Insurance for life and health is slowly gaining traction and insurance for assets such as a vehicle is fairly popular owing to the mandatory third-party insurance cover in it. But home insurance is not as popular. A house is perhaps one of the biggest assets you will own in your lifetime and, therefore, it makes sense to insure it. Let’s us understand more about home insurance.

Home insurance

The basic policy to cover your house is a fire insurance policy. It usually covers your house and its content against fire and other allied perils such as lightening, storms, floods and riots. You can also insure your house against earthquakes (in case it’s not covered already) and terrorism by paying extra premium. A householder’s package policy (HPP), alternatively, is a comprehensive policy that packs in more options along with the fire insurance cover. It also offers covers to insure the content of your house against burglary, damage and mechanical or electrical breakdowns. HPP also includes covers such as public liability (compensates a third-party for losses caused by you), personal accident (offers an income stream for the period you are unable to work due to a temporary or permanent disability caused by an accident) and workmen’s compensation (covers you against injury or death of your domestic help).

Calculating the value

There are two ways of buying home insurance—first is on a market value basis or depreciated cost basis, and the second is on a reinstatement basis. Don’t confuse the market value of your house for its for resale value. In insurance, market value is akin to the value of your house after factoring in depreciation while reinstatement is the value of reconstructing the house. The insurer in this case will not deduct depreciation, so a reinstatement basis is preferable, although you may have to shell out a bit more. Insurers, however, will usually settle the claim only after the house is reconstructed. Some insurers, though, may make partial payments to help you reconstruct the house.

Risk of underinsurance

Make sure you do not underinsure your house. If you buy a cover which is less than the actual value of your house, the insurer will assume you have agreed to self-insure for the remaining cost and will reduce the insurance claim proportionately. Say, you bought a building cover for 20 lakh, but your insurer assessed its reconstruction cost to be 25 lakh. In this case you have paid for only 80% of the risk and so the insurer will pay only 80% of the claim. Unlike a comprehensive auto insurance policy, insuring your house is not as expensive. For example, fire insurance would cost between 0.70 and 1.20 per 1,000 of sum insured. As you opt for more covers, the premiums will increase accordingly.

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