How to buy a home insurance policy?

Home insurance continues to remain an ignored insurance product. A basic home insurance policy is a fire insurance cover that insures the structure of your house and its contents against fire and allied perils such as lightening, storms and floods.

A householder’s package policy (HPP), on the other hand, is a fire insurance policy that packs in more options. It also insures the contents of your house against burglary, damage and mechanical or electrical breakdowns. A home insurance policy is a must for all homeowners.

Here we tell you some important facts to keep in mind while getting one.

The value of your house comprises three broad components, which are: cost of land, cost of construction, and locality costs (a house in a premium location would cost more).

The insurance covers only cost of construction. A civil contractor or a real estate broker will tell you the cost of construction and while it may vary depending upon the city, it doesn’t vary too much between one location and another. Now, there are two ways to arriving at the sum insured—first is on a market value basis or a depreciated cost basis, and the second is on a reinstatement basis.

In insurance, market value is the cost of constructing your house after subtracting depreciation; while reinstatement is the full value of construction of the house. Obviously, premiums for insurance plans that are based on the market-value basis, will be cheaper.

Under the reinstatement basis, insurers don’t deduct depreciation and therefore such plans are preferable. Typically, insurers sell you a reinstatement-based policy but do check and confirm at the time of buying the cover.

You also need to be mindful of underinsurance, as the insurer will penalise you by proportionately reducing the claim amount.

For example, if the cost of construction of your house is, say, Rs2,000 per sq. ft, and you buy an insurance cover for Rs1,000 per sq. ft, the insurer will consider this underinsurance. At the time of claim, the insurer would only pay half the claim amount.

Even if you buy an insurance cover on reinstatement basis, you must remember that insurers will settle the claim only after the house is reconstructed or will make partial payments to help you reconstruct the house.

But then, you still have to get the house reconstructed; and if you live in a flat in a multi-storeyed complex, it means that for you to reconstruct the house, you need to wait for others to reconstruct their houses as well.

In order to deal with such situations, some insurers now offer home insurance on an agreed-value basis.

The agreed value factors in the cost of the area as well; so in the event of a loss, you get the agreed value and the ownership of your house is transferred to the insurer.

You can then take the agreed value and buy a new house, instead of waiting to reconstruct the older house and there is also no threat of any penalty due to underinsurance.