How to Select the Right Sum Insured for A Property Insurance?

Posted on: Oct 5, 2023 | 3 mins | Written by: HDFC ERGO Team

How to Select the Right Sum Insured for A Property Insurance?

It takes years to build the home of your dreams. And that's why it's paramount to safeguard this haven. Property insurance reassures you when unforeseen events threaten to destroy what you have created. However, property insurance can't be effective in the absence of the right sum insured. The sum insured isn't just another figure; it's one of the most important aspects of any insurance policy. It decides the maximum compensation you can get from the insurer. Let's shed some light on the art and science of choosing the perfect sum insured for your property insurance, whether you're a first-time policyholder or a seasoned homeowner.

Understanding Sum Insured

The sum insured is the maximum amount that you, as a policyholder, can claim as compensation from your insurance provider. It is indemnity-based. This means you will be compensated based on the actual costs incurred when you make a claim. If the claim amount is less than or equal to the sum insured by your insurance policy, you will get the entire bill amount minus the deductibles. But if the bill amount exceeds the sum insured, you will have to bear the extra cost. For instance, suppose you have taken a property insurance of Rs 5 lakh sum insured. In a tragic fire accident, the entire house was gutted, causing a huge loss of around Rs 10-12 lakh. But the insurer will reimburse you up to the sum insured, and the extra amount of Rs 5-7 lakh will have to be paid by you. So, choosing the sum insured wisely for adequate protection during a crisis is very important.

Factors Influencing Sum Insured

The factors affecting the sum insured can vary depending on the type of insurance. Here are some common factors —

• Type of insurance:

The sum insured can depend on the type of insurance. For instance, for a healthcare plan it will be based on your age, health condition, pre-existing diseases, etc. For house insurance , the value of the structure and contents of the home or office will influence the sum insured and home insurance premium.

• Coverage:

Comprehensive coverage will have a higher sum insured, which, in turn, will increase the premium.

• Location:

If your location is at risk of natural disasters, crime rates, or is accident-prone, you must buy good coverage with adequate sum insured. A lower sum insured can strain your finances.

• Value of the insured things:

Before selecting the sum insured by property insurance, make a list of the belongings and their cost in case of replacement or repair.

• Deductibles:

A high deductible will lead to lower premiums but can also affect the sum insured.

• Inflation:

This can affect the cost of repairing/replacement of insured items or medical expenses. So, the sum insured may also need to be reviewed from time to time.

How do you select the right Sum Insured for Property Insurance?

To ensure adequate coverage in case of any damage or loss to your property, selecting the right sum insured for property insurance is crucial. Here are some tips to determine the right sum insured.

1. Value of property:

First, make an assessment of the value of your property to be insured. The value should include construction cost, the fixtures and fittings, and contents. If you cannot assess the valuation, you may hire a professional.

2. Inflation:

While selecting the sum insured, take into account inflation, as construction costs can increase over time due to inflation and other factors. So, the sum insured you select today should be adequate in the long run.

3. Replacement cost:

When you file a claim, insurance will typically cover the replacement cost of the items damaged or to rebuild the structure; choose the sum insured accordingly for adequate coverage.

4. Potential risks:

If your property is situated in a region prone to natural disasters like floods or cyclones, you will need high coverage, which will affect the sum insured. A higher coverage will have a high sum insured.

5. Review periodically:

Your property value can change over time due to renovations or modifications. So, to ensure your sum insured or coverage is aligned with the value of your property and its contents, you must review and update your coverage.

FAQs

1. What is the sum insured in insurance?

Sum insured is the compensation you will receive from your insurance provider when you file a claim. If the claim amount is less than or equal to the sum insured, you will get the entire amount minus the deductibles, but if it exceeds, you will have to bear the extra expenses.

2. I recently bought a house facing the sea. How much coverage will I need?

Since your house is close to the sea, there is a likelihood of your house getting affected by floods. You should buy additional coverage for protection against floods. The standard home insurance policies generally do not cover damage due to floods, so you have to opt for a flood insurance policy by paying an extra premium. It's better to talk to your insurance provider before buying any policy.

Conclusion

Before you buy an insurance policy, selecting the right sum insured is crucial to ensure you are adequately protected to deal with any financial crisis. It's important to evaluate your specific needs, your financial capability, and the potential risks. It's always better to slightly overestimate than to underestimate, as insufficient coverage can lead to out-of-pocket expenses and disturb your budget.

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

Understanding the differences between home insurance and property insurance

Here's Why Every Owner Needs Property Insurance Today

How to Calculate Property Insurance Premium?

Want to Check Property Insurance Premium? Here's Everything You Should Know

8 Best Tips to Maintain Your Property Value