How much household insurance do I need?
Saving a few pounds now could be very costly
When you buy contents or buildings insurance you need to decide the right value to put on the items covered. This amount is known as the "sum insured". The premium to be paid depends upon this amount. Premium rates can vary for lots of reasons, for example for a home in an area where burglary happens frequently or for a thatched cottage.
The sum insured must be sufficient to cover the total value of the goods and buildings concerned. Many people underestimate the cost of replacing or repairing their homes and their contents. If the sum insured is set too low then, when damage occurs, they end up finding the insurance only covers part of the cost.
Contents insurance
For contents insurance, the cover needs to be able to meet the cost of replacing what was damaged. If you camera is stolen/destroyed then you can expect a replacement like-for-like model, or as good as if your model is no longer available. This could be cheaper than what you paid for it. However, an old cooker may have cost £50 when it was bought new, but the equivalent model that meets today's safety standards may cost well over £300.
Buildings insurance
For buildings, insurance must cover the full cost of rebuilding the property, including architect and surveyors fees, and the cost of clearing away the debris and meeting any new building regulations or by-laws. This is not the same as the market value of the house.
For "accidental damage" cover you have to pay much more premium but you are covered against such risks as spilling paint on a carpet, or dropping a camera and breaking it.
Rebuilding costs often rise at times when house prices are not moving and vice versa. Take the case of two identical houses in the same town. One is next door to a noisy factory in a crowded industrial area while the other house is on the outskirts of town with pleasant country views. The houses will command very different market prices but the rebuilding cost will be the same.
Accidental Damage
Policies spell out clearly the risks they cover - like fire, theft and flood. For "accidental damage" cover you have to pay much more premium. Then you are covered against such risks as spilling paint on a carpet, or dropping a camera and breaking it.
Indemnity or replace-as-new?
Indemnity policies take full account of the wear and tear on goods so that any claim payment would reflect the age or condition of damaged items. For example, the policy would pay less for a ten-year-old carpet damaged by fire than for a carpet which was only a few months old. Replace-as-new policies provide for the full replacement of badly damaged or destroyed goods with new. There are usually some exceptions such as clothing and household linen.
Clearly, with replace-as-new policies, the sum insured (on which the premium is based) must be higher. For these policies, the contents of the house must all be valued at their new price. Mixed policies can also be bought. These provide replacement-as-new cover for some items such as furniture, carpets and electrical goods which are less than a certain number of years old and indemnity cover for the rest.
The sum insured must be reviewed regularly, particularly at times of high inflation. Otherwise the householder will soon find that the sum insured is too low. Most insurance companies offer index-linked policies where the sum insured is automatically adjusted in line with general rises in costs.
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