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What you Lose by not Having a Home Insurance Policy?

In today’s World uncertainty is the only certainty. The flood that took place in Uttarakhand a year ago is clearly etched in one’s mind. The loss to life and property was immense.

Earthquakes across the World and in India remind one of how fickle life on this planet can be. One still remembers clearly the tsunami that struck the Chennai coast and the Island nation of Sri Lanka a decade ago. The terrible loss of life and limb due to natural calamities cannot be prevented as they are "Acts Of God". However the massive damage and destruction caused by these natural calamities can be mitigated to some extent by the taking of insurance. Taken in this context home Insurance plays a very important role in preserving peace of mind and provides one with a sense of security in these terrible times.

What Is Home Insurance Policy?

  • Home insurance Policy is basically a protection cover taken on one’s home in exchange for a premium. This provides a compensation in case ones home is damaged by fire, riots, lightning, flood, burglary, earthquake, tsunami, terrorism and storms.
  • One can take an insurance cover for a building where compensation is provided for the damage to the property and its reconstruction due to riots, natural calamities like flood and cyclone, landslide, damage due to aircraft, fires and lightning and domestic cylinder explosions.

Types of home insurance policies

  • Fire protection policy : A basic fire protection policy might cover one for loss caused due to riots, lightning, storms and flooding. On payment of an additional premium, cover is provided from an earthquake, landslide and in some cases terrorism.
  • Householder’s package policy : This policy is divided into two segments. namely the house structure protection and the home content insurance.
  • In the house structure protection a cover is provided against damage from fire, domestic cylinder explosions and so on.
  • In content insurance the contents of the house can be insured against theft of valuables such as jewelry, electronic items, costly crockery, electrical appliances, paintings and damage to windows and doors. For those who live in rented houses only the contents of the house can be insured.

Why home insurance Policies cheap when compared to the cost of a house?

  • A house basically consists of land on which the house is built on, the actual structure of the house and the locality in which the house is built.
  • If the market value of the house is INR 70 Lakhs the building cost might be only INR 25 Lakhs. The rest of the cost is due to the locality and the market value of the land.
  • Home insurance covers only the cost of the structure and is concerned mainly with the cost of rebuilding the structure. This cost mainly depends on the city in which one resides. If one is staying in a metro city the costs of construction are relatively higher. The locality might not have too much of a role to play as far as cost of construction is concerned.
  • A house valued at INR 60 Lakhs might have a premium of around INR 1800-2000 for a home insurance policy taken to protect the basic structure and an additional amount of around INR 2000 for the protection of the contents of the house up to an amount of INR 10 Lakhs.
  • A premium of INR 1500-1800 is paid as additional coverage for the protection against burglary and damage to doors and windows up to an amount of INR 10 Lakhs. On a payment of additional premium of around INR 5000-6000 per annum one can obtain protection against damage due to terrorism up to an amount of INR 50 Lakhs and the insurance of the contents of the house up to 10 Lakhs.
  • Death of a domestic worker due to an accident, loss of rent due to damage of the house for a period of around 6 months, and the damage caused to the house given on rent for a period of 6 months are covered in home insurance.

How does the insurer assess the value of one’s house?

  • One has to consider the market value of the house when one takes that home insurance policy. Market value is often mistaken as resale value where the land as well as the construction and the locality are factored in.
  • In the case of a home insurance policy one has the market value minus the depreciation at the rate of 2% per annum. After a period of 50 years the market value minus the depreciation will be zero. Houses over 50 Years of age are not insured. Under a reinstatement policy the cost of rebuilding the house structure is considered. No depreciation is deducted in this case.
  • Let us consider ones house is destroyed in a flood. The land remains in ones name and the new structure can be built at the same location as home protection cover is a basic structure replacement cover.
  • The reconstruction costs are reimbursed after the house has been reconstructed and in some cases the money is reimbursed in installments. One of the most important factors to be noted is one does not need to consider the value of the property but only the cost of reconstruction or structural protection.
  • If a 1000 Square Foot apartment in Bangalore costs INR 80 Lakhs one has to bear only the reconstruction costs of the structure and the land price is not factored in.
  • One can purchase home insurance protection against structural damage for as low as INR 50 per Lakh and for a sum of INR 2000 premium paid per annum protection of about INR 40 Lakhs on the structure can be obtained

What happens if your home is underinsured?

  • Mr Ravi had purchased a house of INR 50 Lakhs. He took a basic home insurance cover against structural damage for an amount of INR 10 Lakhs. Mr Ravi’s house was badly damaged in a fire and rebuilding was necessary.
  • As five years had passed Mr Ravi discovered to his dismay that the reconstruction costs would now cost around INR 18 Lakhs. The severe shortage of sand had led to a massive price hike in the reconstruction costs.
  • After assessing the damage the Insurance Company stated that Mr Ravi would be compensated only an amount of up to INR 10 Lakh. Insurance Companies give a leeway of up to 10-15% owing to the change in prices of the construction.
  • If one is underinsured it means that he has to bear the expenses up to the cost underinsured from his own pocket.
  • Mr Ravi had to bear a cost of INR 8 Lakhs from his own pocket.
  • It is also important to note that if one stays in an apartment and if a flood were to destroy it then one cannot reinstate the apartment by oneself. The whole society needs to get the apartment insured.

What You Should Note While Making That Claim

  • When home insurance cover is taken the insurer does not survey the contents of the house or assess the structure. The deal is made in good faith .However if the structure were to fall a through damage assessment is done
  • It is up to the individual to make the right declaration and have proof to back it. The insurer can refuse the damage claims on the grounds that the building was poorly maintained or an unauthorized construction was done.
  • It is in one’s own interests to see that the claim is done in a hassle free manner. One has to show and maintain bills to prove that one owns the goods that one is claiming damages for.
  • Always maintain an inventory of the goods and contents of one’s house in an orderly manner with necessary billing and proof of purchase which will help one make a hassle free claim.
  • Always take the help of a local real estate agent or a builder to estimate the cost of rebuilding the structure. Once one knows the cost of rebuilding the structure one can estimate the coverage required. If the coverage is not sufficient then hike the coverage.
  • Take note of the additional features that one’s house might incorporate such as marble tiles, ceramics, and costly woodwork. Another common practice followed is having the insurer estimate the costs of rebuilding and mark the contents of the house before a tragedy occurs.

The role of the Indian Government in home insurance

  • The Indian Government plays on important role in the promotion of home insurance. The Government is planning to make it mandatory for all developers to ensure that buildings are structurally sound to withstand fire and earthquakes.
  • A spate of tragedies such as the fire accidents in garment factories in neighboring Bangladesh, collapse of buildings in Mumbai and Bangalore due to faulty construction has led the Government to put its foot down and make home insurance mandatory for developers. This will soon be passed in the Real estate Bill.
  • The home insurance premiums will be lower if the building adheres to the necessary norms, is earthquake resistant, is of a good design and makes use of good technology. The onus is on the developer and builder to follow the seismic code and use earthquake proof technology, better design in projects, and follow the best practices in urban development and planning.
  • Since the developer has to compulsorily take home insurance he is forced to adhere to the set norms and bears liability for the structure he will follow good construction principles leading to the growth of quality construction and save the trouble for the customer to go for an individual home insurance policy.

Home Insurance is still neglected in India

  • It’s very cheap : Considering the basic structure protection costs about INR 50 per Lakh insured per annum this policy comes with a very low price tag. This cheap structural protection policy can save lakhs of rupees in case of the structural collapse of one’s house.
  • Still hardly anyone takes it : It is noticed that in rural as well as highly literate urban areas people usually do not opting for a home insurance policy. If one were to observe the statistics of the insurance Companies mainly the home insurance policies one would notice about 35-40 Lakh policies were sold compared to over 5 Crore life insurance policies taken up in the same period.

One should always plan for the best but prepare for the worst. A small deed done at the right time can go a long way in ensuring success in the long run.

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