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How to decide if you need home insurance?

A basic home insurance provides a cover against damages to the structure of your house. It includes fixtures and fittings that are permanently part of the home structure.

People often spend their life-time savings to buy a house and furnish it. After all, home is where the heart is.

Under these circumstances, any damages caused to their house or their personal belongings hits them hard - financially. 

Some finance experts, therefore, advise buying home insurance. 

What exactly is home insurance?

A basic home insurance provides a cover against damages to the structure of your house. It includes fixtures and fittings that are permanently part of the home structure. False-ceiling, doors, windows as well as electrical and plumbing work (including sanitary ware) and fitted kitchens are covered under it. 

If you are staying in an independent villa, additional structures around the house like a swimming pool, isolated garages and gazebos are usually covered. 

Any damage caused to the home structure by fire, explosion, flood, earthquakes or other natural calamities is covered in this policy. In addition, it includes man-made events like theft, riot or terrorism.

By taking a basic home insurance policy, you will be able to tackle the expenses needed for repairing and renovating the damaged house structure. 

Content cover

A comprehensive home insurance policy in turn additionally covers the contents in the house. Furniture, electronic appliances (washing machine, fridge etc) as well as furnishings such as rug are part of the home content insurance. 

You can add riders to it to include your jewellery, painting or artwork as well.  Content cover is however subject to limitations. For instance, if you buy home structure insurance for a sum assured of Rs 20 lakh, sum assured for content insurance might be limited to Rs 2 lakh (10% of basic insurance). 

A policy covering building structure is available for tenure up to 30 years, while you can take content cover for up to five years. 

Do you need to buy one?

If you have taken a home loan, and recently spent a lot on its interiors, it might be prudent to opt for home insurance. Any unexpected repair work can otherwise set you back financially. 

The costs

A basic home policy doesn’t cost you much. For instance, taking an Rs 20 lakh building structure covers costs about Rs 413 annually. However, if you seek a content cover worth Rs 2 lakh as well, it will cost you Rs 1,414 (at the rate of seven percent of its replacement value). For painting and laptops it’s even more (see chart). For instance, in the above example, adding a laptop with a market value of Rs 50,000 can increase your premium to Rs 2,244 annually.

You can save a few insurance costs by installing burglary alarm systems in your house or choosing a policy of long tenure.

How much sum assured to buy?

While insuring the home structure, for calculation purposes, the cost of land is ignored and only the cost of reconstruction is considered. For instance, if you own a 1000 square feet house and the construction rate in your city is Rs 2,000 per square feet, then the sum assured for your home structure will be about Rs 20 lakh. 

Often, the insurer gives options to choose from the three valuation methods: reinstatement value, market value (indemnity with depreciation) and agreed value. Usually, it is advisable for a flat owner in a cooperative society to opt for the agreed value where its value is arrived mutually at the time of purchase. 

In case of property damage, the sum assured that is agreed upon is paid by the insurer without the need to actually commence the reconstruction work. Often in case of damages to a building, where reconstruction work for individual flats happens in stages, the claim process can be delayed. 

However, if you own an independent house, opt for the reinstatement value method which is based on actual reconstruction cost at the time of repair (illustrated above). 

Market value option which discounts for depreciation is the cheapest of the lot but also results in a smaller claim settlement amount.

All the contents are valued on a market value basis after accounting for its depreciation. As a rule, keep it simple and don’t get carried away by the fancy covers.

Takeaway

A basic home structure policy doesn’t cost you much and makes sense if you have a home loan running. However, think twice before insuring your personal belongings which is a costly proposition.

 

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