How are home insurance premiums calculated?
When you buy a home insurance policy you might wonder about the premium payable for the policy. However, home insurance plans have affordable rates of premiums. In fact, the premium calculation process is quite simple. Let’s understand how home insurance premiums are calculated –
- The type of policy selected determines the basic premium rate
Home insurance policies are of three types – structure insurance, contents insurance and comprehensive insurance (which combines structure and contents). The basic premium depends on the policy that you select. If you opt for structure insurance, first, the cost of construction of the structure would be determined. Cost of construction would be calculated as (total built-up area of the house * cost of construction per square feet). Based on this cost, the premium rate would be determined.
If contents insurance is selected, you would have to specify the total value of the contents to be insured. (Can we provide some examples of contents and their categories) Based on the value of the contents, the premium would be calculated. (Is it appropriate to value contents at purchase cost, depreciated cost or replacement cost? Is there any restriction on this?)
If a comprehensive policy is chosen which covers both structure and contents, the premium for structure insurance would be combined with the premium for insuring the contents and the total premium would be determined.
- Additional coverage benefits add on to the basic premium
After the basic premium rate is determined for the standard coverage, the insurer would check for additional coverage benefits. If you have selected policy extensions (give examples please?) , additional premiums would be applicable for such extensions. This additional premium would be added to the premium of the basic coverage for arriving at the total premium payable.
- Applicable discounts would be deducted
Home insurance plans offer premium discounts for various factors like for installing safety devices in your home, or for not making a claim in previous years, or if you have a new property, (not sure of this last one) etc. If the policy offers any discount and such discounts are applicable to you they would be deducted from the premium.
So, the home insurance premium would be calculated by adding A and B and then deducting C from their sum.
Besides the calculation process, you should also know that home insurance premiums depend on a lot of factors. These factors influence the premium rate and include the following –
- Location and area of the house – these determine the construction cost of the building and the higher the cost the higher would be the premium
- Age of the house – newer homes have lower premiums and vice-versa
- Type of home – flats, bungalows or villas
- Nature of coverage – reinstatement value basis, agreed value basis or market value basis
- The term of the policy – multi-year plans have lower premiums compared to annual plans
The premiums of different home insurance plans also vary across insurers and their pricing policies. Typically, no two insurance plans would give you the same rate of premiums. So, try and explore the premium rates of different insurance policies before buying one.
Make sure that the coverage level is sufficient to avoid underinsurance. If you skimp on the coverage for availing lower premiums, at the time of claims, the claim value would be low and you would incur out-of-pocket expenses.