Right cover for your home

Your own home. It’s not just your most valuable asset, it’s your safe haven from the world outside. While your home cocoons you and your family, it’s your responsibility to see that nothing untoward happens to the building and its contents.

No, we are not just talking about fancy security systems and the like (although those are important too). We are talking about insurance. Insuring your home is as essential as, well, ensuring that it has strong foundations.

But do you know what kind of insurance to take and what it should cover? And how much are you prepared to pay? Did you know that you can insure your home and contents for as little as Rs 5,000 a year? Here’s all you really need to know.

INSURE STRUCTURE, NOT THE LAND

When insuring your home, make sure you buy a policy that covers the structure; insuring the land that your home stands on is not so vital, unless you live in a seismic or floodprone zone.

When insuring the structure, make sure you buy cover on the basis of construction cost, not on how much you paid. The average construction cost per square foot is about Rs 1,000. So, the construction cost of a 1,000 sq ft flat works out to Rs 10 lakh. Even if you bought the flat for Rs 30 lakh, your insurance will cover only the construction cost.

In such an instance, you will have to pay Rs 500 a year to insure against fire, plus Rs 100 if you live in a seismic zone to cover against earthquake. If you take the same insurance based on the price of the house, you will pay over Rs 1,500 a year.

AVOID INSURING CASH

There are people who buy insurance policies to protect the gold and cash they have in the house. Because of the high value and high risk of loss of these, insurance companies charge a hefty premium starting at Rs 1,250 for every Rs 1 lakh of cash or gold (including jewellery).

Experts have differing views on whether one should insure cash. However, the common sense option is to take this cover only if you stay in an area that’s notoriously unsafe or if you fear an accidental loss.

AVOID UMBRELLA COVERS

Most general insurance companies offer a householder’s insurance policy, which covers a combination of risks spread over 10 heads. But simply because the covers are offered is no reason for you to buy them.

Ensure that the policy covers fire, theft and damage to electronic equipment. Anything more than these is usually not too useful and may be a waste of money. Consider other heads only if you have specific needs. For instance, if you live in a rented house, there’s no need to insure the structure. You should insure the contents and electronic equipment, especially geysers and air-conditioners that are particularly susceptible to voltage fluctuations.

Assuming the contents in your house (furniture, clothes, electronic gadgets and utensils) are valued at Rs 5 lakh, your annual premium for insuring this against burglary, fire and damage to electronic equipment will work out close to Rs 1,000.

UNDERSTAND REPLACEMENT VALUE

Unlike insuring the house at construction cost, in case of electronic gadgets there is a huge depreciation that must be factored in. For instance, a television set you buy today for Rs 25,000 could be worth less than Rs 20,000 next year. There is also the possibility of the model being discontinued, making spares and repairs expensive.

When you take or renew cover, benchmark the sum insured to the gadget’s replacement value. If your five-year-old AC can be sold for Rs 10,000 but will cost Rs 20,000 to replace, you won’t be eligible for full settlement on your breakdown claims unless you are insured for Rs 20,000. However, if your AC becomes useless, you’ll only get the salvage value (in this case, Rs 10,000), not the replacement value, as compensation.

Replacement value becomes important when you have to get expensive equipment repaired. Say the AC compressor needs to be repaired and it costs Rs 5,000 to do so, you will get the entire amount refunded if the AC was insured at replacement value. However, if the same AC was insured for Rs 10,000, the current market value (half the replacement value), your compensation will be only half the repair cost.

INTELLIGENT INSURANCE

Five points you must keep in mind when buying cover for your home and its contents.

1. Insure the essentials: Make sure you get cover for equipment and contents that you cannot afford to replace

2. Replacement value: Taking insurance based on the cost of equipment will get you little in case you have to make a claim. Insure them at their replacement cost

3. Insure adequately: If you’re under-insured, you will get back too little to make a difference; if you’re over-insured, you’re shelling out more than you will get back if you ever make a claim

4. Penny wise, pound foolish: Clubbing various risk heads within the householder’s policy might get you an overall discount, but you don’t need the cover offered under some of those heads

5. Update your insurer: If you’ve added or replaced equipment or furniture, inform the insurance company