How is the home insurance premium determined?

A home insurance policy protects your home and takes care of financial losses, in case of any calamities. A comprehensive home insurance policy protects in case of both natural as well as man-made damages, and safeguards the policyholder’s home against multiple calamities. With the financial help provided by insurers, policyholders can also rebuild their homes in case of an accident.

Having said that, industry experts say there is a lack of awareness about home insurance in the country, which often leads to misconceptions, leading to people not taking the right insurance cover for safeguarding their home.

While it is imperative to check what all events are covered under the policy, choosing the right sum insurance is equally important.

Experts say the sum insured can be arrived at by multiplying the cost of construction with the area in square feet and with suitable escalation. Rakesh Jain, CEO, Reliance General Insurance, says, “In case of home insurance, the sum insured and the premium are calculated on the basis of property area, rate of construction (per square feet), and the location of the property. The insured sum of two houses of the same size can be different. It is important to calculate the right coverage amount for your house’s structure so that you don’t end up being over-insured or underinsured.”

For instance, if the cost of construction is Rs 1700 per sq. ft, and the area is 1400 sq. ft, the sum insured for the building structure will be around Rs 23,80,000. For an independent house, compound walls, fences, sheds, paving, and landscaping should also be included with separate values for each.

Experts say the amount insured should be the cost of building reconstruction for an independent house, whereas it can be agreed value for apartment/flats. Subramanyam Brahmajosyula, Head -Underwriting and Reinsurance, SBI General Insurance, says, “Please keep in mind, reconstruction value is not the same as the market value of the house which might be higher or lower of the loan/actual value. Reconstruction value is the cost incurred to rebuild the house if it is damaged. It is based on the cost of construction prevailing at the time of loss.”

Here are some factors that determine the home insurance premium;

• Coverage – The type of plan you choose along with the amount of sum insured affects your premium.
• Cost of Construction – Your home insurance premium depends on the cost of construction of your property, higher the cost, higher the insurance premium, and vice versa.
• Tenure – The duration of your home insurance policy also affects the premium. A long-term policy is highly recommended as it costs lower in the long run.

Jain, of Reliance General Insurance, says, “Also, note that the property is insured for the value that it would require to rebuild it and not for its market value. Whereas, the contents in the house are insured for ‘market value minus the deprecation’.”