Category: Financial Planning

Points to note while insuring your home

A house is constructed with bricks and beams, but a home is crafted with affection and aspirations.

There is no place in the cosmos quite like home. It's where cherished memories are woven and celebrated with loved ones, creating a tapestry that lasts a lifetime. While we invest our life's earnings in acquiring or building a home, we often overlook the necessity of insuring it.

Your home is not only your most substantial and valuable possession, but it is also the nucleus of your life and lifestyle. The loss of your home due to unforeseen events such as fire, earthquakes, or legal disputes can be profoundly disruptive. The growing frequency of natural disasters is a cause for concern, as the devastation they leave behind can lead to significant financial setbacks. However, with prudent planning, you can mitigate this risk.

An insurance policy is a legal commitment wherein an insurance company pledges to compensate you for losses specified in your policy, in exchange for the premiums you pay. It's important to note that insurance isn't akin to a bank account where your premiums accumulate; instead, it represents the insurer's commitment to cover the expenses resulting from covered risks affecting your property within the policy's duration. Your home insurance policy offers protection for a defined period, typically one year. Should you fail to renew your coverage, the insurance company won't indemnify losses occurring after the policy period expires.

Understanding Home Insurance: There are two primary types of home insurance policies:

    • Basic Fire Insurance Policy
    • Comprehensive Policy/Householder’s Package Policy (HPP)

A basic fire insurance policy safeguards your home against fire and related perils, including lightning, storms, floods, and riots. Some insurers may require an additional premium for protection against catastrophes like earthquakes and landslides. You can also secure your house and its contents against terrorism by adding an optional cover.

Key Considerations:

    • Home insurance reimburses the building's cost, not the land.
    • It's advisable to calculate the reconstruction cost with a broker or civil contractor before purchasing or renewing your policy.
    • Opt for reinstatement cost over market value, as market value accounts for depreciation.
    • Safeguard proof of your insured items in a location separate from your home, as these documents are required for claim settlements.
    • Your claim may be denied if your home's construction is substandard or unauthorized.

The fundamental coverage divides into two categories: one protects the building's structure against fire and related perils, while the other covers the house's contents. Tenants can choose coverage for their possessions only. An HPP also provides optional covers for protecting contents against theft, damage, and mechanical or electrical breakdown.

Determining the Sum Insured: The value of your home comprises land, building, and location costs. Insurance covers only the building's cost. For instance, if your house's market value is INR 1 crore, with the building accounting for INR 30 lakh, your policy will insure only INR 30 lakh. However, what if your entire house is destroyed, as happened recently in Uttarakhand when rows of homes were washed away? If you own the land, you should be able to rebuild the house. But for apartment owners, reinstating the house isn't an individual effort, making it advisable for housing societies to acquire insurance for the entire premises.

Home insurance can be purchased in two ways: market value basis or depreciated cost basis and reinstatement basis. Market value should not be confused with resale value. In the context of insurance, market value is the house's value after factoring in depreciation. The insurer typically depreciates market value by 2% per annum, reaching 100% depreciation in 50 years. In contrast, reinstatement cost reflects the expenditure required to rebuild the house, without depreciation. It's recommended to opt for reinstatement cover for both the house and its contents. However, remember that the insurer will settle claims only after the house is reconstructed. Some insurers may offer partial payments to aid in the reconstruction process.

What Does It Cost? Securing your house and its contents through insurance is relatively affordable. For example, insuring a building for INR 30 lakh and contents for INR 5 lakh with a fire insurance policy covering fire and allied perils, along with terrorism protection, would cost approximately INR 2,000 per year. If you include burglary and theft coverage for INR 5 lakh, the premium rises to INR 3,155. Adding additional coverage for domestic appliances breakdown for INR 4 lakh increases the annual policy cost to about INR 5,600. If you're a homeowner, it's advisable to purchase home insurance without delay. Tenants, on the other hand, can choose to insure their contents exclusively.

Inclusions in Home and Property Insurance: Home insurance offers protection against losses to your home's structure and contents resulting from natural and human-made calamities, including:

    • Fire and peril coverage
    • Aircraft damage
    • Fire
    • Lightning
    • Riot and strike
    • Storm, cyclone, flood
    • Missile testing operations
    • Earthquake coverage

However, many policies exclude coverage for flood or overflow from seas, rivers, and lakes caused by earthquakes.

Burglary and Theft Cover: Home insurance extends to cover the contents of your home against theft or burglary. This coverage can also include silver items, jewelry, precious stones, and valuable items provided they are kept in a locked safe within your home premises.

Exclusions in Home Insurance: Home insurance typically does not cover:

    • Loss or damage due to wear and tear and depreciation
    • Loss of cash
    • Damage resulting from war, invasion, or acts of foreign nations
    • Damage due to nuclear war
    • Destruction of or damage to electronic equipment caused by overrunning or excessive pressure
    • Comparison of Rates Offered by Various Insurance Companies: Several insurance providers offer home insurance policies with varying features. Here's a comparative overview:
    • New India Assurance's Griha Suvidha is one of the most comprehensive home insurance plans. It includes burglary, terrorism, and jewelry (up to INR 4 lakh) coverage by default at a competitive premium rate.
    • L&T Insurance provides 'third-party liability cover' for an additional premium.
    • With the exception of HDFC Ergo's plan, burglary coverage is included by default in standard policies offered by other insurers.
    • HDFC Ergo's home insurance plan offers a low premium for basic and standard coverage.
    • ICICI Lombard's home insurance plans offer various coverage options, except for 'third-party liability cover.' This plan provides basic, burglary, terrorism, and jewelry coverage (up to 25% of the content sum assured) at competitive premium rates.

How to File a Home Insurance Claim: In the event of an accident, prioritize your safety and that of your home. If possible, take measures to prevent further damage.

Contact your insurance provider through their helpline number, fax, or email and report the damage.

Whenever feasible, take photographs of the damaged areas of your property. Additionally, retain bills and receipts for services availed after the accident.

Depending on the accident's nature and the extent of the damage, your insurer may request