Home Insurance is a must

Last month an apartment in our parents’ society caught fire. The building had to be evacuated, nobody got hurt but the apartment that caught fire is completely destroyed inside. The reason for the  fire was a faulty wiring in the apartments. For the longest time my father was reluctant to buy his home owner’s insurance and I could not convince him otherwise. In fact it is just not him, I found many people of that generation reluctant to buy any insurance beyond life insurance.

My Parents Apartment Complex
My Parents Apartment Complex

Their lack of home insurance used to make me very uncomfortable. Since only few years back they moved into their dream home and are now enjoying their sunset years. It used to bother me to imagine how a single adverse event can put them in an avoidable financial difficulty. So I ended up buying their home insurance policy and since then every year I renew their policy along with my insurance for the apartment I own.

Coincidentally this year I had renewed their home insurance just 1 month prior to this fire incident. My father had wanted me to stop wasting money on home insurance since they tried filing a claim for minor water damage in the kitchen and the company did not pay. In my mother’s words “The builder is very good and he has built it to withstand earthquakes so no need for any insurance”. But once this fire incident made it to the T.V News Channels & Newspapers, all our relatives/friends started calling our parents to make sure they are ok. Now my father no longer considers it is a waste as they’ve been jolted from their complacence. They now agree that it is useful.  So starting this year my parents will pay for their own home insurance 🙂       

Almost all of us take life insurance and since motor vehicle insurance is mandatory we take that as well. Health Insurance has become mainstream now. So we are left with one major insurance which is not commonly taken – Home Insurance.

As per a survey, it is estimated that only 30% people in India have home insurance however 75% knew that it was important to take a home insurance. In spite of knowing it is important most people did not insure their homes. This seems very absurd considering the love we have for buying real-estate. Most Indians like my parents are real-estate rich and cash poor. When you have so much at stake what stops one from insuring their homes?  It costs only approx. Rs.2500 per year to insure a Rs.50lakhs apartment and Rs.5000 per year to insure a Rs.1 crore apartment.

Benefits of buying Home Insurance

Natural calamities have increased manyfold in the last 10 years all over the world. In India, Chennai floods & Kerala Floods are just some recent unfortunate incidents where people lost their homes or incurred heavy damages. Home insurance 

  1. Covers your house and its contents against events beyond your control such as fire, floods, lighting strikes, windstorms, hail and even theft.
  2. You have something to fall back on in unforeseen circumstances: In case of damage you get money to repair or rebuild a damaged home so you can continue to live there  or move somewhere else instead of rebuilding.
  3. Protects your lifestyle:  if you take proper and prior insurance , it will enable you smoothly get back into your earlier lifestyle using compensation from insurance companies

Where does insurance fit in Early retirement plan?

Well, Personal finance consists of three different aspects:

  • Generating Wealth through a job or business,
  • Accumulating Wealth through savings and making the right investments,
  • Protecting Wealth– Protecting what you have by insuring it, so that all of a sudden you you do not lose what you have accumulated over a period of time.

Insuring your house comes under protecting your wealth.

Types of Home Insurance available in India

For the past 3 years we were taking a Re-Construction home insurance for our apartment.  The major issue with this insurance is it only insures the value equal to the construction cost of a house.

Knowing that 3 years back, I was a bit shocked because construction cost was only ⅓ of my apartment’s market value. I wondered what I will do if something does happen to my apartment.  I would be left with no house and with reimbursement of just ⅓ rd of its actual value. That is not enough to buy a new apartment. 

The other problem with re-construction option for apartments is that all the owners have to agree to demolish the entire building complex and rebuild it from scratch. But if only your apartment was gutted like in my parents’ building example, you would be out of luck even if you have insurance. 

Re-Construction option is better suited for independent houses where one owns the land under the house and there is only one house built on top of that land. It is not suited for apartments.

3 years back there was no other option because insurance companies did not cover market value of your  apartment back then. But this year i discovered Agreed Value insurance.

If you live in an apartment complex you can opt for agreed-value option which insures your apartment at the agreed market value. It has to be a reasonable value, that in case of claim should corroborate with the then going market rate. One caveat is that if you want the full insured amount you have to hand over your apartment to the insurer. With the amount you receive in return you can then buy an apartment elsewhere. If you only want to do repairs and live in the same apartment then the claim will be paid on reconstruction cost basis. Source

Other add-on covers to home insurance : 

Home insurance primarily covers the structure of the building. There are other add-on covers that protect your high-value contents from damage & burglary, temporary rental cover, water damage cover etc. We recommend you first insure the structure and choose add-ons only if you absolutely require it.

6-Steps to buy an Home Insurance

  1. Take out few hours over a weekend to research – this is usually a one time exercise. In future you just need to renew your insurance annually
  2. Establish the value of your house and its contents – put reasonable value because your premium is derived from the value you are insuring. At the time of filing claim insurance companies can dispute if they find you had inflated the value of your house or its contents.
  3. Compare home insurance from top insurers on following basis:
    1. Check their premiums and coverage
    2. Claims settlement ratio
    3. Company’s reputation
  4. Most Importantly read the terms and conditions of your insurance: To avoid any misunderstanding on your part about the policy coverage do read and clarify the policy T&C.
  5. Understand the policy Exclusion: This is very crucial. Understand very clearly what is not covered under your home insurance so if needed you can buy an add-on.
  6. Go Online and buy (saves you commission): In case of doubt call customer support centre for help. Sometimes it is better to call the local office number of the insurer as they may be better-informed than customer-service reps. That was my experience.

Good articles about Home Insurance

Conclusion:

Home Insurance is a very useful product about which there is very little awareness. There is a lot of conflicting information on the Internet. Sometimes even customer-service reps of the insurance companies themselves give out wrong information. We hope other financial journalists launch an education campaign like they did for mutual funds & health insurance to clear all doubts and gotcha clauses. We’ve done our small bit 🙂

Home insurance helps an individual to protect their house from risks beyond their control by compensating some amount for the losses. Risks can be either natural or also man-made. Anyone who owns a house or rents a house must take suitable insurance to protect their wealth and peace-of-mind.

Please share your experiences with home insurance in comments. I’m interested to know if anyone has filed a home insurance claim successfully.

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5 COMMENTS

  1. Thanks for the information Naren. I’ll investigate but I’ve always found these plans absurd. The premiums seem to bear no relation to the level of risk. For example, it’s far more likely that I’ll drop dead in the next 20 years than my house will collapse in the next 10 years, yet the premium I get quoted for the same 3Cr amount is more than double for my house as compared to me.

    Maybe the market needs to mature a little bit more.

  2. It‘s a love and hate relationship with insurers. Most of the time the change their terms more than once a year and if your really want to understand the meaning, exclusions, caveats behind their fancy product names it sometimes feels like a fulltime job to keep up with the changes in fine print. I insure my real estate for third party damage mostly. Contents I found to be insanely expensive compared to value (and cost). Rebuild is usually covered by the administrator who takes out the insurance on behalf of the owner association. Haven’t made a claim yet so I have little experience but am looking forward to what other people have to say.

    • Thanks for the detailed reply. Yes! I too found insuring contents to be expensive. especially if house is rented out then insuring contents is the tenants responsibility.

      Since Home Insurance is not well-known here in India, the practice of association taking insurance has not caught on here. Also associations here are notorious for decision paralysis. They constantly bicker over paying maintenance, organising festivals and getting promised facilities from the builder even many years after handover. So a Quadrant-2 activity like Home Insurance is the last thing on their minds especially since it would increase the monthly maintenance.
      So for apartment owners in India, I recommend taking their own Agreed-Value insurance.

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