BackFive questions on home insurance
It makes sense to apportion a small amount towards insuring your house and its contents
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The frequency of natural calamities is a hotly debated topic and increasingly a cause for concern. Life comes to an abrupt halt when nature comes down in all its fury and the destruction it brings with it leaves indelible pain in the hearts and pockets of those affected. While there is little to assuage emotional trauma, there is hope in terms of a financial setback. You can insure your assets such as car and house. In fact your house is one of the biggest assets that you will own in your lifetime, therefore it makes sense to insure your house and its contents. Mint Money answers five questions on home insurance that should help you shop for the right policy.
What is home insurance?
There are two types of insurance policies to cover your house—basic fire insurance policy and a comprehensive policy, also called the householder’s package policy (HPP). Fire insurance policy covers your house against fire and other allied perils that include lightening, storm, flood and riot. However, some insurers may ask you to pay an extra premium in order to cover other natural disasters such as earthquake and landslides. You can also insure your house and contents against terrorism by buying an add-on cover. HPP on the other hand packs in more covers. The basic cover bifurcates in two parts: one covers the structure of the building against fire and other allied perils and second covers the contents of the house such as furniture, valuables and other household items against the same perils. For those who live in a rented accommodation, cover for just the contents can be opted for. Over and above the basic cover, a HPP also offers optional covers that insure contents of your house against burglary, damage, mechanical or electrical breakdown. Other covers include public liability cover (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 either a temporary or permanent disability due to an accident) and workmen’s compensation (covers you against any injury or death of your domestic help).
How do you choose the sum insured?
The value of your house essentially has three components: land, building and locality costs. Insurance will cover only the building cost. So, for instance, if the market value of your house is 1 crore, of which building cost is about 30 lakh, your policy will insure only 30 lakh. “A civil contractor or a broker will tell you the cost of construction. The cost of construction will vary depending upon the city but not so much on locality. For instance, currently in Delhi the cost of construction is 1,800 per sq. ft," says Rahul Aggarwal, chief executive officer, Optima Insurance Brokers Pvt. Ltd.
While insuring your house may help in case of a partial damage, what happens when the entire house is brought down, like it happened in Uttarakhand where rows of houses got flushed away? “If the land is yours, you should be able to rebuild the house. But if you have an apartment, you alone can’t reinstate the house. Therefore it’s recommended for housing societies and associations to buy insurance for the entire premises," says Rajagopal Gopalan, head-operations and claims, Bharti AXA General Insurance Co. Ltd. There are two ways of buying home insurance: one is on the market value basis or depreciated cost basis and the other is on the reinstatement basis. Don’t confuse market value for resale value of your house. When you re-sell your house, you get the value of land and the locality as well. In insurance, market value is akin to the value of your house after factoring in depreciation. Imagine if you were to sell your car, you would get the depreciated value. “Insurer will normally depreciate the market value by 2% per annum going up to 100% in 50 years," says Aggarwal. Reinstatement on the other hand is the value of reconstructing the house. The insurer in this case will not deduct depreciation. Go for reinstatement cover even in case of the contents of the house. But keep in mind that the insurer will settle the claim only after the house is reconstructed. Some insurers may make partial payments to help you reconstruct the house.
What happens if you are underinsured?
You will also need to review your cover periodically to ensure you are not underinsured. “If the policyholder underinsures himself, we assume he has agreed to self-insure for the remaining cost. The insurance claim in this case will reduce proportionately," says T. A. Ramalingam, head-underwriting, Bajaj Allianz General Insurance Co. Ltd. Say, you bought building cover for 5 lakh. After five years hence, your insurer assesses its cost of construction to be 7.5 lakh. In this case you have paid for only two-thirds of the risk and therefore you will be paid only two-thirds of the claim. “It’s difficult to assess the cost of construction regularly. Therefore insurers do give some room to policyholders. Underinsurance usually up to 15% is condoned," says Gopalan.
How much does it cost?
Insuring the house and its contents against fire and allied perils is not very expensive. For instance, for a sum insured of 30 lakh for the building and 5 lakh for the contents a pure fire insurance cover that covers against fire and other allied perils along with a terrorism cover would come to about 2,000 for a year. Pack in burglary and theft cover for a sum insured of 5 lakh and the premium will be 3,155. Add additional cover for breakdown or damage of domestic appliances and electronic equipments for a sum insured of 4 lakh, the policy will come for about 5,600 for a year. If you own a house you should buy home insurance as soon as possible. If you are a tenant you could insure just the contents. “In case you are getting your house constructed, you could buy a property under construction insurance to insure the building. But if you have a builder apartment under construction, you can only buy home insurance once the construction is complete and the house is registered in your name. Although most builders buy insurance to insure the building under construction," says Gopalan.
What happens at the time of claim?
It’s important to cover your house adequately, but do not ignore the claims process. When you buy insurance for your house, the insurer usually does not survey the building and the contents before insuring them. He insures them on the basis of your declaration in good faith. But at the time of a claim the insurer will have the damaged goods inspected thoroughly. Therefore you will need to ensure that you have made the right declaration and you have sufficient proof. “Insurer can refuse claim in case of subsidence building or poorly maintained building or unauthorized construction," says Sanjay Datta, chief-underwriting and claims, ICICI Lombard General Insurance Co. Ltd. Even for contents, you will need to produce bills to prove you own them and show the actual cost. Understand all nuances carefully before buying a home insurance.
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