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Importance of Having a Home Insurance Policy in India Research Team | Posted On Thursday, April 18,2019, 10:07 AM

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Importance of Having a Home Insurance Policy in India



Home is one of the most expensive investment a person makes in his lifetime. Sometimes people put all their life savings into building a house and therefore, home is certainly one of the important assets. However, once the home is constructed it is exposed to natural perils. Catastrophes such as earthquake and other natural perils can cause permanent damage to the structure of your house, leaving it in a terrible condition. A home insurance can secure your home against natural calamities and provide financial help for any losses incurred.

What is a Home Insurance Policy?

Home insurance refers to a type of policy that provides financial cover for the losses or damages caused to an individual’s house or assets. By investing in a good home insurance policy, you can protect your home from threats like burglary, fire or any natural calamities like flood or earthquake. The home insurance policy is designed in a way that it not only protects the structure but also the contents of the house.

Protection for the Structure of your House

A home insurance policy provides financial coverage for the damages incurred due to natural or man-made calamities. It is a comprehensive policy that not only provides cover in case the structure of the building gets damages but also renders coverage for the contents of the house. This enables you to deal with the repairing cost and recover financial losses.

A Basic Policy Covers the Cost of the Structure of the House

A basic home insurance policy covers the following:

Structure of the house: This coverage is for the structure of your house. You can choose from the following options in order to determine this value, based on which your premium is fixed. This factor also determines the amount you get during a claim:

  • Reinstatement value: This refers to a procedure where the insurer provides only the construction cost of the house. Here the policy holder is not liable to receive the value of the land on which the house is built.
  • Agreed value: Here the home insurance policyholder is given the cost of construction of the house along with the cost of the land.
  • Indemnity value: This is the present market value of your house. Indemnity value is calculated based on the age of your home and depreciation value. It also includes the construction cost of your house.

SEE ALSO: Insurance for Dream Home

The Difference Between these 3 Covers:

Given below is an example that will help you get clarity about the difference between the above mentioned covers:

Let's say, Mr. Agarwal wants to purchase a home insurance policy for his 15 year old family home which is built on an area of 1000 sq. ft. Let's assume the cost of the house is Rs. 3000 per square foot based on its location. So the total cost of the house is around 30 lakhs. The construction cost of the structure of the house is Rs. 1500 per sq. ft or Rs. 30 lakhs

Now if Mr. Agarwal buys a home insurance policy that only covers the reinstatement value, then sum insured will be calculated as : area of the house * construction cost per sq. ft. 

Reinstatement value: (1000 * 1500) = 15 lakhs

If Mr. Agarwal avail a home insurance policy based on the agreed value, then he is liable to receive a sum insured inclusive of the area of the house multiplied by per sq. ft cost of the house.

So, agreed value = 1000 * 3000 = 30 lakhs

If the house is insured by a home insurance policy on the basis of the indemnity value, then the sum assured would be the total cost of the construction minus the depreciation. Let's assume the depreciation is 30%, the sum insured would be Rs. 10.5 lakhs (Rs. 15 lakhs minus Rs. 9 lakhs, which is the construction cost minus depreciation at 30%).

Most of the insurance companies determine the home insurance cover based on the reinstatement value or market value. A few companies also offer insurance cover based on agreed value.

Content Cover for Personal Belongings

Despite the increase in number of home buyers, a home insurance policy is still an under purchased product. Home insurance provides dual cover for the structure as well as the assets contained in the house. While the structure of the house is of prime importance, the contents too can add up to a large amount. Given the increasing rate of crimes, the contents of your home are prone to theft, riots, burglary or terrorism. A home insurance policy will safeguard your assets and secure your belongings from mishaps. You can insure your contents either by buying a cover that accounts for depreciation or a reinstatement cover.

The contents cover must be declared to the insurer through invoices and bills. Under the reinstatement cover, the policy holder would receive cash refunds for the items insured by the policy without any allowance for depreciation.

However, one should keep in mind that reinstatement insurance policies are costlier than the other home insurance policies and involves extensive terms and conditions. Some insurers provide replacement cover for general and electronic items that are up to 10 years old. The items can be replaced with the same model based on the market value of the product.

SEE ALSO: What is a Home Insurance Policy?

Additional Cover

A policyholder can further strengthen home coverage by availing additional covers. While buying the home insurance policy, the insured has the option of availing add-on benefits as per his requirements. Add- on covers can be chosen based on the exclusions in the policy. For example, a policy holder living in a flood prone area can opt for an add-on rider for floods if the same is excluded from his home insurance policy.

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The policyholder has to declare the value of the assets and consider which rider they would like to include in their insurance policy. The insurance company will specify the premium based on the number of riders availed by the insured. Typically the riders available under the home insurance policy are personal accident cover, burglary and theft cover, earthquake cover etc.

Buying a home insurance policy saves you from the strikes of misfortune and acts as a precautionary measure to protect your most valuable asset. However it is advisable, that you understand the terms and conditions of the policy before purchasing one. Also make sure to check the policy every three to five years as the cost of construction will constantly increase due to inflation.

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