Home insurance plans usually have affordable premiums. The premium calculation process too is quite simple.
Let’s understand the process to calculate home insurance premiums and the factors that determine the rate.
Type of policy
Home insurance policies are of three types – structure insurance, content insurance and comprehensive insurance (which combines structure and contents). The basic premium depends on the type selected.
In the case of structure insurance, the cost of constructing the structure is first determined. The cost per square foot into the total built-up area is the cost of building the house. This determines the premium rate. Typical construction costs range from Rs 2500 to 10,000 per square foot. Most standard constructions cost about Rs 6000 per square foot. Do note that this cost does not cover the cost of land.
The total value of the material also decides the premium for a content insurance plan. In some cases such as art or antiques, it may be difficult to determine the value. In such cases, it is good practice to agree on the value with insurers when placing the insurance. This is called “Agree Value” insurance, quite obviously.
In the case of a comprehensive policy, the premium is a sum of the premiums of the other two types.
Additional coverage benefits
The policy comes with additional premiums for extra coverage benefits like policy extensions. Policy extensions can include third party damages or the cost of temporarily moving to a new apartment. Therefore, this additional premium is added to the premium of the basic coverage.
Home insurance plans offer premium discounts for facilities like installing safety devices in your home. An insured may also be given discounts for not making a claim till then or if the property is new.
There are some other factors that influence the home insurance premiums.
- Location and area – These determine the construction cost of the building or the house and the steeper this cost goes, the higher is the premium. Areas that are earthquake-prone or in congested areas cost more to insure.
- Age of the house – The premium is low for newer homes and vice-versa.
- Type of home – The premium rate depends on whether the structure is a flat, bungalow, or villa.
- Nature of coverage – It is also as per the reinstatement value basis, the agreed value basis, or the market value basis.
- Term of the policy – The premium is lower for multi-year plans as compared to annual plans.
- Presence of a basement
- Commercial activity that might be taking place in the building
Premiums vary across insurers and their pricing policies. So, it is advisable to compare the premium rates before buying a policy. One must make sure that the coverage level is sufficient to avoid underinsurance. Opting for lower coverage to reduce premium costs will result in out-of-pocket expenses.