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Sunday, May 10, 2015

Take cover against disasters

You can't stop calamities but you can minimize their impact on your finances
It has taken a devastating earth quake to shake homeowners in In dia out of their slumber. Seeing the trauma and destruction in Nepal, everyone wants to know whether they can insure homes against earthquakes and how much would it cost.

Very few people take home insurance in India. "Even though it is very cheap, less than 1% of people who can afford home insurance actually buy this cover," says Tapan Singhel, Managing Director and CEO, Bajaj Allianz General Insurance Company .

This is surprising because India is disaster-prone. As much as 30% of the Indian landmass is prone to earthquakes of severe intensity. Another 27% is prone to moderate earthquakes.Nearly 12% of India is prone to floods and 76% of its coastline is prone to cyclones and tsunamis. "Even if someone buys home insurance, it is for a very short tenure. There is a greater need to buy a cover against disasters," says K.K. Mishra, Managing Director and CEO, Tata-AIG General Insurance.

How much it costs

A 1,500 sq ft house can be covered for `50 lakh against fire and other perils for less than `1,700 a year. If contents worth `10 lakh are included, the cost will go up by `400. You don't need to take a cover for the market value of the property but only for reconstructing it.Construction costs vary from `1,000 per sq ft for a no-frills structure to almost `3,000 per sq ft for premium.

Some companies offer discounts if you buy a comprehensive policy with additional coverage. We like the Householder Policy from Oriental Insurance that offers an array of 10 covers and gives discounts to buyers who tick on more than four. The policy covers nearly all the risks that your house and valuables are exposed to. A basic cover of `50 lakh for the building and `10 lakh for the contents is as cheap as `2,100 a year (see table). It can be bought online, though you might have to spend 40-50 minutes on drawing up an inventory of the items you need to cover.

As the cost of reconstruction keeps rising, you might have to increase the insured amount every few years. Some insurers offer discounts if you take a multi-year policy . If the premium for a `50 lakh cover is `3,800 a year, it will be 18% lower at `15,590 if you buy a fiveyear policy . If the escalation of rebuilding costs is a worry , HDFC Ergo has a policy where the sum assured goes up every year. The basic insurance cover rises 10% every year. The premium of the escalation option is higher at `19,100 compared to `15,590 charged for a normal `50 lakh cover for five years.

What gets covered

While all home insurance policies offer cover against earthquakes, some insur ers have a compulsory 5% deductible in case of damage due to an "act of God". An act of God is any event, especially a natural disaster, for which no individual can be held responsible. The deductible means that if your house is insured for `50 lakh, and it suffers a damage worth `20 lakh, the first 5% of the claimed amount (or `1 lakh) will be borne by you. Some insurers don't even have such deductibles. "Policies covering individual residences or dwellings with individual owners do not have compulsory deductibles. However, policies covering housing societies are subject to deductibles depending on the sum insured," says Subrahmanyam B, Head, Health & Commercial Underwriting, Product Development and Reinsurance, Bharti AXA General Insurance.

In some policies, this deductible can be customised. Raise the deductible, and the premium goes down.

What is not covered

While you can cover the contents of the house against damage and theft, some valuables are not covered. Cash, documents, share certificates and debit or credit cards are not included. Jewellery and other valuables are covered, but subject to ceilings. Some policies specify that the cover for jewellery will not exceed 25% of the total contents insurance cover sum insured or `1 lakh, whichever is lower. The individual responsible for the theft is also critical to the claim getting passed. "If the contents have been stolen by a relative or a household help your claim will not be admitted," says financial planner Pankaj Mathpal. When covering appliances and gadgets, ascertain the cost of replacing the item. An item is insured for its market value after depreciation. The insurance company will pay the amount required to restore an item to the condition it was in before damage.Simply put, a refrigerator or an airconditioner might have cost you `40,000 about five years ago, but its depreciated value will now be Rs 20,000-22,000.

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