Home Insurance – Protect your Dream Home from Catastrophe:
It is said that “the heart is where the home is”. Your home holds a special place in your heart in addition to other beautiful things in life. You are not only financially but also emotionally attached to your home. You work so hard to buy a home and put in so much time and efforts to decorate it with things of your choice. You spend precious moments of your life at home and have sweet memories attached to it. A short circuit or a sudden gas leak is enough to bring down your dreams to ashes. It is a nightmare which nobody wants to come true but as we all know life is full of uncertainties. You cannot eliminate the risk of such mishaps, but you can provide for it using Property/Home Insurance.
Home Insurance is an agreement between two parties – the house owner and the insurance company- wherein, the insurer promises to indemnify the losses suffered by the house property on account of events mentioned in the scope of policy in return for a fixed premium paid by the insured. The maximum amount of liability of the insurance company in case of loss does not exceed the insured amount. Thus, a true home insurance policy protects not only your cherished home but also the precious and special memories and emotions that reside therein.
Statistics of property insurance in India presents a grim picture. KPMG in its study found that in 2012 the property insurance occupied a tiny share of 9% as compared to the lion’s share of 41% held by motor insurance of the total non-life portfolio. Moreover, only motor and health insurance will drive overall growth of general insurance in India and property insurance will see a marginal increase by 2020. So here the point to be noted is that when you accord so much respect to your home then why you stay a step behind when it comes to insuring your home against risk? The reasons for lukewarm response among individuals towards property insurance could be assigned to low willingness, difficulty in understanding the scope of coverage, lengthy claim settlement process, inadequate indemnification and poor product design.
“Ignorance is no bliss”. Only running away from reality and being ignorant of risk is not a prudent risk management approach. The first step towards buying the right home insurance cover begins with an understanding of risks that your home is exposed to.
The risks are classified into natural disasters and risk due to man-made reasons.
1. Natural disasters encompass damage to the building and its contents due to lightning, storm, cyclone, typhoon, hurricane, flood and inundation, subsidence and landslide including rockslide, bushfire, earthquake, spontaneous combustion, etc.
2. Damage to the building and the articles within due to man-made reasons include aircraft damage, riot, strike, malicious damage, Bursting &/or overflowing of water tanks, apparatus and pipes, missile testing operations, war & warlike operations, nuclear perils, pollution or contamination, electrical/mechanical breakdown, burglary and housebreaking, etc.
The loss suffered due to these risks can be classified into two categories:
1. Direct Loss
It consists of expenditure incurred to replace the damaged house building. It may include expenses incurred on repair of damaged contents present in the home like furniture, fittings, electronic equipment, valuables, etc.
2. Consequential Loss
When House building is damaged then you may be required to shift to alternate accommodation on rent and move the contents from one place to another. The extra expenditure in the form of rent and other living expenses constitute the consequential loss.
Usually, basic home insurance policies offer two types of coverage- one related to the structure of house building and the other related to contents of the home. You may select risk cover for the structure or the contents or both. You may get add-ons to the basic policy on payment of extra premium which may cover consequential loss as well.
How is Premium calculated in Home Insurance?
In the case of home insurance, the premium is calculated based on the sum insured, property area, the location of the building, the age of the property and the rate of construction (per square feet). Because of this the amount of premium of two houses of the same size can never be the same. The premium for a newly constructed house built in 1000 sq ft in a central location in Mumbai will be more than an old construction of the same size located in outskirts of Mumbai. Here, it is vital to note that the property is insured for the value that would be required to reinstate it and not for the market value. Whereas, the contents of the house are insured for market value adjusted for depreciation.
How much Home Insurance coverage is adequate?
To ensure that you purchase an adequate home coverage, you need to keep following points in mind:
1. Cost of House Reconstruction
In the event of damage to the original house property, the sum insured chosen by you should be adequate to rebuild the damaged part of the house or for total reinstatement of the building from scratch. The sum insured should be determined considering built area of the house, local cost of construction, home exterior material, number of rooms in the house, roof type and roofing materials, any other assemblies in the proximity of the building like a garage or sheds, any unique features within or outside the house like arched windows, fireplaces, trims on the exterior, etc.
2. Cost of Contents
While estimating the sum insured of home insurance; along with the house building, you should consider the cost of repairing or replacing the contents that are destroyed/damaged/stolen by the insured eventuality. For this, you need to prepare detailed list of the contents of your house like valuables, electronic appliances, furniture, kitchen appliances, furnishings, etc. and the replacement cost in case of damage, destruction or theft. You may choose an insurance policy that provides either the Actual Cash Value or Replacement Cost.
3. Cost of Alternate Accommodation
In the case of any damage to the original house due to the insured eventuality, you may have to vacate your house and shift to an alternate accommodation until your original house is fully reinstated. Such an act may require you to incur expenses like room rent, meals, etc. Moreover, if rented part of your house has been damaged/ destroyed then you may suffer the loss of rent as well. So, while going for home insurance, you may choose an insurance policy that indemnifies you for the additional living expenses as well as loss of rent.
4. Public Legal Liability cover
In the case of home insurance, you (insured) are the first party and insurer is the second party. The third party refers to any other person who may face bodily injury or whose property may be damaged because of you or your family’s actions.
Suppose your neighbour’s car sustains severe damage when the boundary wall of your house falls on it, then you are liable to compensate him for such loss. A comprehensive home insurance policy takes into account such risks & indemnifies the affected party.
You can opt for a comprehensive home insurance policy which covers the cost of any legal liabilities which you might have to pay as a result of an order of the court. It would be prudent to select a higher sum when you are going for Public Legal Liability cover add-on.
Important points that you should consider while choosing a Home Insurance Policy:
Looking at the ever-rising construction costs, you should choose a policy which indemnifies the full replacement instead of the actual cash value of the house property in case of damage/destruction by an insured peril. Living expenses form an inextricable part of the rehabilitation process in the event of any mishap. You should look for a policy that has a built-in living expense benefit. You should know the exact worth of your home and the contents present therein to select an appropriate sum insured. For this, make a detailed list of inventory and keep it in a safe and accessible location. Be aware of the risk factors on account of your geographical location and ensure that these are present in the scope of your policy as insured risks. As a risk reduction and premium reduction measure, you may install safety measures in your home like fire extinguishers, smoke detectors, thief alarms, etc. Finally, you should know the claim settlement procedure and the documents required to file a claim.
Selection of Home Insurance policy is rather a less cumbersome process than buying or constructing your dream home. Keep all the factors mentioned above in mind and make an informed decision. Read the policy document carefully and choose an adequate insurance coverage.