Importance of Having a Home Insurance Policy in India

Building or buying a home requires a huge investment and it is a very precious asset for you & your family. It is a place of your residence, where you feel a sense of protection and security. Residing in your own home provides you a sense of protection and security.

Considering the recent environmental changes, your home is at a risk of any natural calamity such as earthquakes, cyclones, floods, etc. As, you also houses the jewelry and other valuable items, your home is also prone to man-made calamities such as thefts, robberies, riots, strikes, and terrorism. Moreover, the cost to rebuild the house requires huge expenses which is not really easy to afford. But with the advent of home insurance, you can breathe a sigh of relief.

A home insurance policy provides financial protection against any damage/loss incurred to your home and its contents. A basic home insurance policy provides cover against fire and allied perils, including fire, riot, strike, lightning, explosion, storm, cyclone, and flood. A comprehensive householder’s policy provides protection against any damage to the structure of your home and its contents.

Before opting for a home insurance policy, it’s wise to know the importance of home insurance in India. Following are the key coverages that you will get on purchasing a home insurance policy.

Cover for Home Structure

Building/structure cover is available through 3 methodologies, namely Reinstatement Value, Agreed Value and Indemnity Value.

Reinstatement Value: The insurer provides only the construction cost of the house, excluding value of the land.

Agreed Value: It includes the cost of the land and the construction cost as well.

Indemnity Value: It is based on the current market value of your house. It takes into consideration the cost of construction and the depreciated value of your house.

Let’s understand this cover with the help of an example.

If an individual is looking to purchase home insurance for his/her 10 year-old house which has an area of 1,000 square feet. Just assume, the cost of the house is Rs 4,500 per square foot, or Rs 45 Lacs (1000 * 4500), and construction cost is Rs 2500 per square feet, or Rs 25 Lacs (1000 * 2500).

If the individual buys a home insurance policy on the basis of reinstatement value, the sum insured will be the construction cost of the house, i.e. Rs 25 Lacs.

In case, the individual buys a home insurance policy on the basis of the agreed value, then the sum insured will be the area of the house multiplied by the cost per square foot, i.e. Rs 45 Lacs.

If he/she buys a a home insurance policy on the basis of the indemnity value, the sum insured will be the total cost of the construction minus depreciation. If, for example, depreciation is 25%, then the sum insured will be Rs 18.75 Lacs (Rs 25 Lacs minus Rs 6.25 Lacs).

Additional Reading: Why Buying Home Loan Insurance Does not Make Sense?

Cover for Personal Belongings

While re-building the home structure is quite expensive, the contents of your house add up the value. There are two basic methodologies to insure the contents of your home, namely Replacement Value and Indemnity Value.

Replacement Value: It is based on the value of replacement of the same contents with the new one, without deducting depreciation.

Indemnity Value: The sum insured is calculated on the basis of the cost of attaining the new content after deducting depreciation.

Let’s understand this cover with the help of an example.

If an individual is looking to purchase the contents cover for his/her house. Just assume, the cost of the content damaged/lost is Rs 5 Lacs.

If the individual opts for contents cover on the basis of replacement value, the sum insured will be the value of replacement of the same contents, i.e. Rs 5 Lacs.

If the individual opts for contents cover on the basis of indemnity value, the sum insured will be the cost of attaining the new content less depreciation. If the depreciation applied is 10%, then the sum insured will be Rs 4.5 Lacs (Rs 5 Lacs minus Rs 50,000).

Add-on Covers

While opting for a home insurance policy, you have the option to include add-ons or riders as per your suitability. Typically, you can choose riders such as, Burglary and Theft Cover, Earthquake Cover, Terrorism Cover, Personal Accident, Rent Cover, Public Liability Coverage, Personal Accident, and many more.

The additional cover available may differ from one insurer to another. You can opt for rider(s), on payment of additional rider premium. It is advisable to go through riders benefits and then choose a one, if you really needs it.

Conclusion

Buying a home insurance policy is actually a proactive measure, which ensures that your home structure and its contents are secured against any probable damage or loss. While buying a policy, it’s a right move to declare the value of assets, so you can choose the right sum insured.

It is advisable to understand the terms and conditions before buying the policy and choose the best home insurance policy that covers your home & its contents. Don’t forget to assess the policy every three to five years, as the cost of construction will increase. You can secure your home & its contents at a low premium, so it is easily affordable.

Harjot Singh Narula

Harjot Narula is founder and CEO of ComparePolicy.com, an IRDAI approved insurance web aggregator focussed on selling online insurance for companies. Harjot has more than a decade of experience in software development and has also spent 5 years in US working for the mortgage and risk management industry.

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