Essentials of buying home insurance, why it is a must-have protection

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Published: May 26, 2016 5:05:02 PM

A home insurance policy offers coverage for untoward situations. However, to get maximum benefit from the insurance policy, it should be sufficient.

Home insuranceHome insurance is not a very popular insurance policy in India.

Those who have lost their homes in earthquakes and landslides stand testimony to how easily our houses, which took years to build, get destroyed and how tough it is to rebuild them. While there is little one can do to evade natural catastrophes, we can cut some of the hardships by buying a home insurance policy, which is a shield against any loss or damage to the house and its valuables.

However, home insurance is not a very popular insurance policy in India. According to the survey conducted by a reputed general insurance firm, around 93 per cent respondents do not have home insurance policy in India. Even though 62 per cent respondents were aware of the importance of a home insurance policy, merely 7 per cent had actually bought it.

When you don’t mind spending thousands of rupees in decorating the interiors of your home, why there is so much resistance when it comes to buying a good home insurance policy? In comparison to a series of steps taken by you to protect your haven, a home insurance policy is a more appropriate step taken towards protecting against risks.

So, buy a good insurance policy for your house and let nothing affect it— not even Acts of God! If you think it is worth picking, here are some pointers that will guide you towards the right direction.

Evaluate risks your house may face: Before buying the policy, it is important to evaluate the location that you dwell in and its risk-proneness. Do you live in an area that is adequately secured? Or, do you live in a place which is earthquake or flood prone? On the basis of risks, you will be able to choose the right policy.

Choose the correct sum insured: A home insurance policy offers coverage for untoward situations. However, to get maximum benefit from the insurance policy, it should be sufficient. Mainly, a home insurance policy has the following components:

Cover for structure: The cover for structure is calculated in three different ways:

Reinstatement value: It is computed on the basis of the built-up area and the total construction cost.

Agreed value: It includes the area of the land and the total cost of the house.

Indemnity value: It considers the total construction cost and the depreciated value as per the age of the property.

It means if the built-up area of your house is 1500 sq ft, the cost of the house is Rs 2000 per sq.ft, and the construction cost is Rs 1000 per sq.ft, the reinstatement value will be Rs 15,00,000 (1500×1000). If the home insurance is bought on the agreed value, the sum insured will be Rs 30,00,000 (1500×2000). Similarly, if it is calculated on the basis of the indemnity value, it will be the total construction cost minus depreciation. In this case, if we assume depreciation rate as 25 per cent, the indemnity value will be Rs 11,25,000 [Rs 15 lakhs minus Rs 3.75 lakhs (25 per cent of 15,00,000)]. An idea should be to choose a sum insured which will be sufficient to rebuild your house in case of any mishappening.

Cover for content: At the time of buying the content cover, make sure to disclose the correct valuation of all the insured items. You should start making an inventory of the items which you want to cover. There are some insurers which want photographs of all the insured items as an authentic proof of the existence of belongings in the house. However, some insurers don’t go into such details and rely on a list prepared by the insurance applicant.

It’s also about the location of your house: Although, insurance companies aren’t coming to check out nearby schools or restaurants, these factors do play a significant role. Homes situated near fire stations and police stations, for example, may cost less to insure.

Check exclusions: The last thing you want is that your particular claim falls under the exclusion list of your home insurance policy. Events, like the willful destruction of property, losses if a house remains unoccupied for over 30 days without prior notice to the insurer, cash, etc are not covered under the policy.

Go online: Purchasing home insurance online is fast, easy and often cheaper than offline. Online sales help insurers trim their operational costs, including agent’s commission, which is often passed on to the customer in the form of low premium rates. In addition to affordable premium rates, there are other benefits, such as the instant issuance of policies and customisation.

Think of long-term property insurance plans: It is difficult for most people to renew their home or property insurance plan every year because of the financial constraints or any other reason. So, it becomes cost-effective and hassle-free, if you go for the long term home insurance policies, like 10 or 20 years, in one go.

Compare before you buy: As insurance doesn’t follow ‘one-size-fits-all’ approach, make sure to check and compare different insurance policies on their features like coverage, tenure, riders, etc.; so that you don’t miss out on a profitable deal.

Check claim settlement ratio: A high claim settlement ratio means that the insurer is honoring maximum claims. It is the yardstick for the buyer to determine which insurer is reputed and preferable.

Check solvency ratio: The insurer is obligated to settle claims but what if it genuinely cannot do this due to its poor financial state? Therefore, before buying any insurance policy, it makes sense to check the solvency ratio which is a measurement of the financial state of the insurance company. The higher the solvency ratio, the better the insurer’s liquidity position.

Be aware of the house insurer’s claim process: One should carefully familiarise oneself with the claim process right from the time of buying the policy so that when the calamity strikes you know what to do next. In the case of any eventuality, the insurer deploys a surveyor, and the claim is settled after the assessment of losses.

Read terms and conditions of the policy: Before signing, read the fine print and double-check inclusions and exclusions of the policy. If there are errors in the insurance document, even if it is a spelling error, immediately inform your insurer and get an endorsement without saying.

A home is your precious asset and insuring it is a fool-proof way of protecting it from all hazards, be it natural or man-made. No one knows what the future holds for us, but we can at least take some steps by buying the best home or property insurance to avoid financial losses.

The author is a freelance journalist. Views expressed here are personal.

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