Home Insurance

2016-08-18 18:03:00 UTC

home insurance

The value of real estate investments is constantly increasing, mainly due to the scarcity of land in urban areas and the demand for it, due to population explosion. However, while people spend an awful lot of money on acquiring a property, furniture & décor, appliances and upholstery for their homes, they are in general indifferent when it comes to home insurance.Very few people appreciate the need or understand the risks of not having an insurance cover in place.

According to a recent survey by ICICI Lombard General Insurance, only seven per cent of the respondents had some kind of home insurance, although around 66 per cent of the respondents were recent home buyers. According to yet another report, floods damaged property worth nearly ₹ 27,000 crore in India in the recent past, but insurance covered only a negligible percentage of this colossal loss.

Given the fact that home insurance is relatively inexpensive and offers protection to an individual’s most prized possession, there is certainly a case for more people to seriously consider home insurance policies, as a financial risk mitigation measure. Here is all you need to know about home insurance to take the plunge and benefit.

Why do you need home insurance?

India is predisposed to natural and manmade disasters. As the seismic map of India below shows, around 59% of the land area is susceptible to earthquake hazards. In recent times Latur in Maharashtra, Bhuj district in Gujarat and parts of India bordering Nepal have experienced earthquakes and tremors of varying intensities. Moreover, most of the coastline in peninsular India is prone to cyclones and a large part of India is vulnerable to floods, the impact of which is aggravated by unbridled and chaotic urban development that interferes with waterways causing inundation. In the last decade or so Mumbai and parts of Maharashtra, Uttarakhand, J&K, UP, Andhra Pradesh, Orissa and quite recently Chennai and parts of Tamil Nadu have had to deal with death and destruction due to floods.

seismic map

seismic map of india

Apart from natural and man-made calamities, your home is also exposed to the danger of theft and burglary. A Home Insurance Policy can be handy in such situations.

What does home insurance cover?

A home insurance policy provides you security against damage to the structure of your house due to threats such as fire, earthquake, flooding, vandalism, etc. Optionally, you can also cover your material possessions from unexpected loss and burglary. If you live in your own house, you can buy a comprehensive policy that covers both the structure of the building as well as its contents, but if you live in a rented house, you can only insure the contents of your home.

Inclusions in coverage

  • Fire, burglary and theft
  • Riot, strike and malicious damage
  • Earthquake, flood, lightning, landslides, etc.
  • Bursting or overflowing water tanks, apparatus and pipes, leakage from sprinklers
  • Explosion and implosion
  • Missile testing operation and aircraft damage

Exclusions from coverage

  • Loss or damage by the insured or his employee
  • Loss or damage to any illegally acquired property
  • Cash, cards, stock or other documents
  • Loss or damage occurring when the home remains unoccupied, for a long period (usually 30 days)
  • Section of the house used for commercial purposes
  • Painting, works of art and antiques

However, a fundamental requirement is that the asset or property for which you need insurance must be in your name. In the case of a housing society or an apartment block, the office bearers of the housing society or association can acquire the policy. The policy in such cases will cover the society building, as well as all the utilities that are common and are owned by all members of the society. Policies for housing societies will however have higher deductibles as compared to individual homes.Home insurance basically covers the cost of damage or loss, allowing you to repair the damage and refurbish your home. As with all insurance policies, there are home insurance policies to suit different pockets. So, a premium policy may cover earthquakes, floods, etc. apart from fire while many others may not. It is important that you subject the different options available to a thorough scrutiny, before zeroing in on the best policy for you. The idea is to make sure that the policy covers your home against all risks it could possibly be exposed to.

What are the various insurance coverage options available?

The basic idea of home insurance is to get an adequate cover to rebuild your house in the event of unexpected damage. The value of your cover can be arrived at in 3 different ways. These are reinstatement value, market value and agreed value. Agreed value option is the most desirable and as the name implies, here the insurer and the insured come to an agreement on the value of the re-building cost of the house and its contents. However, most insurers do not offer this option. The next best option is reinstatement value. Here, the insurance covers the cost of replacing the contents or structure or both. Market value is another option where you get a depreciated value of the items covered.

All your material belongings must be included in your content cover without fail, as you cannot be selective i.e. you cannot exclude the furniture and choose to have a cover for the electronic items and jewellery alone.To arrive at the value of insurance cover, all you need to do is multiply the floor area of the house by its current cost of construction and allow for some escalation. Make an itemized list of all valuables and add their cost to arrive at an overall value.

How much does home insurance cost?

If you live in a rented home, you can insure the contents(belongings you have). Assuming you want your appliances and furniture covered for around ₹5 lakh in total, it would cost you around ₹1700- ₹4000 a year, with the more expensive option providing a 2 lakh jewellery sublimit, and covering against terrorism and burglary as well.

If your building has security measures such as 24/7 guard, and intercom/access card controlled access, your premiums decrease further. The age of the building is also taken into account in the premium calculation, newer ones have cheaper premiums.

For those who own the property they live in, the calculation is trickier. Home insurance policies cover the cost of reconstruction and not the market value of the property. The reinstatement value depends on the built-up area and the construction cost estimated by your insurer. For instance, if the built-up area of your home is 2,000 sq. ft and the construction rate assessed by the insurer is ₹ 1,800 per sq. ft, the sum insured for your home policy will be ₹ 36, 00,000 plus the value of your possessions. The rebuilding cost is location specific, due to variation in the cost of construction from one place to another. Also, if you have used expensive imported materials for flooring or have invested heavily in furnishing the apartment, the sum assured needs to be revised suitably to account for the increased cost of rebuilding.

The premium for home insurance may also vary from place to place. For example, if you live in a seismic zone or a flood prone area, the insurers may charge a higher premium. Moreover, if you have a basement floor, it might be difficult for you to get an insurance cover for it especially in low lying areas.

Many insurers offer discounts on premiums for installation of certain loss prevention and safety measures like smoke detectors, burglar alarms, etc.

There are sub-limits to how much you can claim under various heads of the home assets cover, although they differ from one insurer to another. Jewellery typically has a sub-limit of approximately 10% of the contents cover. Similarly, some insurers have a 5% compulsory deductible in case of damage due to an unavoidable natural catastrophe. In the insurance world, this is described as “an act of god” or a force majeure event.

Rebuilding could cost anywhere between ₹ 1,500 to ₹ 3,500 per square foot depending on the building specification and details. A 1,500 square foot house can be insured for ₹ 23-53 lacs, for which the premium will be roughly ₹ 1,380-3,180 a year. Premium for valuables of ₹ 10 lacs could cost an additional ₹400 a year.

Once you have bought a policy, periodically review if the sum assured is adequate, since the cost of reconstruction will change with time due to inflation. In addition, since the home insurance market in India is still nascent and evolving, there is a possibility of premiums dropping in future and in such an eventuality you must seriously consider switching to take advantage.

Opting for a long-term policy is cost effective, as you can get substantial discounts on premium. However, over long term, the rebuilding costs change significantly and unless the policy has an in-built provision to increase sum assured on an annual basis to allow for cost escalation, it’s not attractive.

In a nutshell, Home insurance should be an integral part of your financial planning. Rebuilding your home is an expensive proposition and having the right home insurance cover can make the process less difficult apart from providing you the peace of mind. At a cost of ₹6/day, it’s possible to obtain a cover for your property.