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While home insurance is gaining popularity, home-building insurance is also an important cover as it insures the structure of your home for its reconstruction value. If covered, insurers will reconstruct one's home if it's damaged from aircraft damage, storm, flood or lightning. Financial Chronicle talks to experts to find out more details.

According to ICICI Lombard, the home insurance policy insures the structure of your home for its reconstruction value (and not for market value). Reconstruction value is defined as the cost incurred to reconstruct the home if it is damaged. On the other hand market value is a combination of cost of land, demand and supply scenario. The sum insured is calculated by multiplying the built up area of your home with the construction rate per square feet. For example, if your built up area of your home is 1,100 sq ft and the construction rate is Rs 1,000 per sq ft, the sum insured for your home structure is Rs 1,100,000.

With more and more people buying insurance online, insurers recommend the rate of construction for your location when you are buying online. "However, this value can be revised appropriately if expensive material - like marble flooring - has been used in construction. It is important to note that if your home has lawn or garden surrounded by a perimeter wall, the construction rate can be revised to include the cost of construction of this wall in home structure sum insured," said Sanjay Das, a Kolkata-based financial adviser.

The home insurance products out in the market usually combine protection for both your home structure and the household contents. The fire and specials cover (which protect the structure) are available for for minimum sum insured of Rs 500,000 for less than Rs 400 annual premium, according to HDFC Ego General Insurance. For sum insured of Rs 5,000,000, one may have to pay less than Rs 4,000 as premium. Home building insurance can be availed on an annual basis or for long-term. Sum insured (re-construction cost) for home building insurance has to be assessed and self declared. As per standard procedure the reconstruction cost includes the value of plinth and foundation and does not include the value of land, feel insurance experts. The policies usually covers against the fire and allied perils. There are add-on policies available to cover damages caused by earthquake and other natural calamities.

An important point to be noted is that the cover should be in the name of the person who is the legal owner of the property. "The customer gets a discount for opting for a longer term of cover. The discount percentage can vary depending on the term chosen, which is roughly between 15 per cent to 50 per cent," said Ajay Bimbhet, managing director, Royal Sundaram Alliance Insurance.

He added that instead of long-term discounts, customer can opt for an escalation clause, in which the sum insured (SI) increases every year by 10 per cent of the original SI. If the customer opts for this clause, he/she does not get any reduction in premium by any of long term discount. However, the property value also moves up every year to take care of the inflation in construction cost. Insurance experts feel that the insurance policy is a policy of indemnity and at a loss if the property value is greater than the SI, then the loss suffered would be proportionately reduced. So, escalation clause helps you to combat inflation to an extent.

Source: http://www.mydigitalfc.com