A lot of mis-selling takes place in home insurance policies...!

Structural Insurance cover for a home comes in 3 ways.

First is based on the reinstatement value where the insurer gives the construction cost of the house excluding the value of the land.

Second is based on the agreed value of the property and includes the value of the land and the construction cost.

Third is based on the indemnity value, which takes into consideration the cost of construction and the depreciated value according to the age of the building.

It is important to understand the inclusions & the exclusions.

 Mr. Rohit Shah, Founder and Chief executive officer, Getting You Rich, a financial advisory company said, “A lot of mis-selling takes place in home insurance policies. People are fooled into believing that they will get a cover of a crore or 2 if they buy an expensive policy. Often, the structure cover formula, which is based on the area of the house and the approximate construction cost in the city, is not explained properly,”

Let’s take an example.

Suppose an individual wants to insure his / her 10-year old house with an area of 1,000 square feet. The cost of the house, based on parametres such as as locality, is Rs.5,000 per square feet or Rs.50 lakh. Its cost of construction is Rs.2,000 per square feet or Rs.20 lakh.

If the home insurance policy is bought on reinstatement basis, the sum insured will be the area of the house multiplied by the construction cost per square feet (1,000 x 2,000) = Rs.20 lakh.

If home insurance is bought for the same house on agreed value basis, the sum insured will be the area of the house multiplied by the cost per square feet (1,000 x 5,000) = Rs.50 lakh.

On the basis of market value or indemnity, the sum insured will be the total cost of construction minus depreciation (Rs.20 lakh minus Rs.5 lakh considering depreciation of 25%), which makes it Rs.15 lakh.

While the market value or the reinstatement value are common ways to decide cover, the agreed value formula is not frequently used.

Bajaj Allianz General Insurance Co. Ltd is one insurer that gives home insurance on agreed value basis.

“The sum insured in this is the area of the house multiplied by ready reckoner cost. This cost is declared by local authorities and the insured can also engage a government approved valuer to value the house. The cost would depend on several factors such as the locality, city and quality of construction,” said Mr.Sasikumar Adidamu, Chief Technical Officer, Bajaj Allianz.

Src: Mint

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