Determining sum assured for home insurance

Home insurance is as important as health insurance and it needs to be given the attention it deserves. But, more often than not, many people simply ignore this crucial insurance to their own detriment, so when disasters strike, they are left to fend for themselves.

However, due to better awareness, of late more and more people are insuring their homes and hearths from natural calamities and man-made disasters. The only issue is whether the insurance cover they buy is adequate enough to take care of their needs when their home is damaged due to a natural disaster or burgled by a gang of thieves. So how does one decide whether or not the home insurance bought by a person is adequate or insufficient?

The value of a house comprises of three components, viz. cost of land, cost of construction and locality cost. It needs to be understood beforehand that insurance cover only the cost of construction of the house, whereas the market value of the house may be much higher, depending on the city or the town in which it is located and also the area of location within the city. The sum assured for the house can be arrived at based on the market value minus the depreciation or on the basis of reinstatement cost of the house, which is the full value of the construction of the house.

It is always preferable to go for sum insured based on the market value net of depreciation as the premium would be less than the sum assured based on the reinstatement cost. If the house is in a multi-storeyed tower, insurers offer agreed value as the basis for a sum assured, so that all the members of the housing society are offered compensation to the extent of the agreed value of the flat.