How to Calculate Property Insurance Premium?

Posted on: Sep 23, 2022 | 3 mins | Written by: HDFC ERGO Team

How to Calculate Property Insurance Premium?

It takes many years of hard work and saving to buy a property. Property is not just a concrete structure for many on the contrary, it is their dream come true. Any damage to the property causes mental trauma and of course, it will lead to financial stress too. To safeguard yourself against any loss the best thing to do is to have property insurance. With insurance for property, the property owner is protected against any huge financial loss which can happen due to theft, fire, storm, flood, lightning, etc. Under this insurance, the property is covered along with all the contents that include furniture, electric appliances, jewellery and clothes. The policy can be bought for both commercial and residential properties.

In this post, we will discuss everything you need to know about property insurance and also how is property insurance premiums calculated.

Types of Insurance for Property

The following are some of the main types of property insurance that one can buy:

1. Homeowners’ Insurance

Homeowner’s insurance is one of the most common types of insurance and also the most bought in India. This protects a residential building or a housing property against any financial loss. Also, many lending companies and financial institutions have made it mandatory for house owners to buy this insurance if they intend to get the house financed.

2. Commercial Property Insurance

This insurance as the name suggests is for commercial properties and under this policy, warehouses, offices, restaurants, shops, factories etc. can all be covered. All businesses should have this insurance to protect their working capital if there is any loss or damage to the premises or to the contents.

3. Renters’ Insurance

Tenant or renters’ insurance is like homeowner’s insurance but is meant for people staying on rent. This covers the belongings of the tenants in the rented accommodation.

Besides the above, under property insurance, an insured can also buy fire insurance or a natural disaster insurance policy.

Factors Affecting Premium for Property Insurance

The property insurance premium mainly will depend on the coverage that it provides. Some of the factors that will affect the calculation are:

• Kind of Property

As mentioned above as well, there are different kinds of properties that can be covered under the policy. A property can be commercial or residential. The former has a higher risk than the latter, and the insurance premium for their insurance is higher. The risk factor here is what plays a big role in the calculation of premiums.

• Value of the Contents

Essentially property insurance includes the insurance of a building and the contents. The two thus, form the basis of premium calculation among other things. A comprehensive property plan will include contents like electronic appliances, jewellery, furniture and fittings, etc. These are for a residential building. On the other hand, if we see a commercial establishment, the contents will be machines, inventory, raw materials, etc.

• Value of the Structure

The value of the property is another very important factor which affects the property insurance premium. The calculation of the value of the structure is done based on the rate of construction on the basis of per square feet, super built-up area, and the location of the property. Size is not only a factor and thus, two properties of the same area can also be valued differently.

• Stock Value

The merchandise or goods value is known as the stock value. These can be semi-finished goods, finished goods, stock invoiced, stock in progress, raw material, raw material and packaging material, etc. All of these are the responsibility of the insured and thus, the value affects the premium.

• Sum Insured

For an insurance policy, the maximum amount of coverage given to the insured is the sum insured. This is the maximum amount he can claim in the event of a mishap. The premium is higher for a property with a higher sum insured. Opting for the right sum insured is extremely important to avoid being over insured or underinsured.

How to Calculate Premium

There is a calculator available for the calculation of fire insurance premiums and the same can be used to calculate property insurance premiums. An approximate amount can be calculated that will be needed to pay for property insurance. These insurance premium calculators are simple to use and extremely convenient. Some basic details of the property need to be entered. Details like size, type, the value of the structure, build-up area, value of stocks and value of contents need to be calculated. These are the factors which will affect the premium amount. After entering these details, an approximate value of the premium payable is available.

Things to Remember

When buying property insurance, there are some important things which should be kept in mind:

● If you are in rented accommodation, you cannot get comprehensive property insurance. You can only get insurance for the house contents

● The sum insured should be chosen carefully keeping in mind the cost of the stricture and the value of the contents. This is important to ensure that you are not over-insured and paying extra premium or under-insured and thus, are not compensated properly at the time of a claim

● If you want to reduce your premium you can opt for a higher deductible or get the basic coverage. Apart from this get anti-theft devices etc. to reduce risk and thus, the premium

● Do not use purchasing price of the house as the sum insured. Instead, use the cost of construction and value of contents

Conclusion

A property, be it residential or commercial, is not easy to buy and that is also in the present times when property prices are sky high. On top of it due to various reasons, the risk of owning a property and maintaining it is high too. In this scenario, one thing which is often ignored but should be very important is property insurance.

When you insure your property, you ensure that any loss or damage to the structure and its contents, does not set you back financially. The cost of repair or reimbursement is taken care of by the insurance company. There are several factors which affect the premium for property insurance. Once these factors are understood, you will know how much premium should be paid to ensure that you are well covered. Understanding this is essential to make sure you have adequate insurance which will keep you covered without burning a hole in your pocket when paying the premium for your property insurance policy.

Disclaimer: The above information is for illustrative purpose only. For more details, please refer to policy wordings and prospectus before concluding the sales.

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