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July 26, 2013
The frequency of natural calamities is a cause for concern. The destruction it brings with it leaves a big hole in the pockets of those affected. However, with a little care, you can avoid the financial setback. Since your house is one of your biggest assets, it makes sense to insure your house and its contents. We give you a lowdown on how to shop for the right policy.
What is home insurance?
There are two types of home insurance policies — 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 including lightening, storm, flood and riot. However, some insurers may ask you to pay an extra premium in order to cover 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 into two: one covers the structure of the building against fire and other allied perils and the second covers the contents of the house. Tenants can just opt for cover for just the contents. A HPP also offers optional covers that insure contents of your house against burglary, damage, mechanical or electrical breakdown.
How do you choose the sum insured?
The value of your house has three components: land, building and locality costs. Insurance will cover only the building cost. For example, if the market value of your house is Rs. 1 crore, of which the building cost is Rs. 30 lakh, your policy will insure only Rs. 30 lakh. “A civil contractor will tell you the cost of construction, which will vary depending upon the city,” says Rahul Aggarwal, CEO, Optima Insurance Brokers.
But, what happens when the entire house is brought down, like it happened recently 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 to buy insurance for entire premises,” says Rajagopal Gopalan, head, operations, Bharti AXA General Insurance.
There are two ways of buying home insurance: one is on the market value basis or depreciated cost basis and the other on the reinstatement basis. Don’t confuse market value for resale value. 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. “Insurer will 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?
The value of your house has three 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 TA. Ramalingam, head-underwriting, Bajaj Allianz General Insurance. Say, you bought building cover for R5 lakh. After five years, your insurer assesses its cost of construction to be Rs. 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.
How much does it cost?
Insuring the house and its contents is not very expensive. For instance, for a sum insured of R30 lakh for the building and R5 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 R2,000 for a year. Pack in burglary and theft cover for a sum insured of Rs. 5 lakh and the premium will be Rs. 3,155. Add additional cover for breakdown domestic appliances for a sum insured of Rs. 4 lakh, the policy will come for about Rs. 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.
What happens at the time of claim?
It’s important to cover your house, but do not ignore the claims process. 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, claims, ICICI Lombard General Insurance.