The smart thing when buying a property would be to plan your insurance needs simultaneously. No one is immune to adversities, but those that can be avoided should very well be. The right property insurance plan is one that truly reflects the value of your property, secures the money invested, and is also affordable in terms of the premium charged. All these considerations boil down to one key component – the sum insured. How exactly do you come up with a value that adequately covers your losses under unfortunate circumstances? Let’s find out!
What does the sum insured in Property Insurance mean?
The Sum Insured is the total value of your new property, indicating the maximum amount you are allowed to claim in case of any damage resulting from fire, theft, natural calamity, etc. Depending on the type of policy and its conditions, this value will either be paid to you or the repair work taken care of by the insurance provider.
With an investment as big as this, the sum insured is the only thing that dictates how soon you recover from a financial setback resulting from any damage to your property.
Now that its significance is established, let’s go back to the methods for fixing this value.
Methods to fix the sum insured in Property Insurance
The official insurance regulator in India, IRDAI, mentions two methods to find the sum insured in its Handbook on Property Insurance:
Sum Insured Based on the Market Value
The current market value of any asset reduces with age. Therefore, the cost at which you purchased an asset will be more than what the insurer compensates you for in case of any damage. What this means is that with age, the insurer levies a depreciation on the asset. As such, the sum insured payable to you is not sufficient to buy a replacement for the damaged asset.
Sum Insured Based on the Reinstatement Value
In this method, the insurer does not deduct any depreciation and pays the full amount of replacement (subject to the sum insured). The only condition is that the claim amount is awarded after the damage has been replaced. This is only applicable in the case of fixed assets.
In addition to these two methods, there is a third one applicable in certain instances.
Sum Insured Based on the Original Cost of Purchase
In the third method, the sum insured is fixed based on the original purchase price of the asset. However, it is only applicable in the first year of insurance coverage since the purchase.
Here is an example to simplify these terms for you:
Assume that you bought a piece of new electronic equipment for ₹1 lakh in 2013. This is the cost of purchase. Ten years later, in 2023, you can sell this asset for only ₹50,000. This is the current market value of electronic equipment, depreciated with age. Now, similar but new equipment costs ₹2 lakh in 2023. This is the reinstatement value of the asset.
In the first method based on market value, the sum insured will be equal to the cost of the new equipment minus the depreciation in the market value of the old electronic equipment.
In the second method based on reinstatement value, the sum insured will be equal to the cost of the new equipment. This type of Property Insurance compensates the insured sufficiently without any deductions.
Does a higher sum insured guarantee a higher claim?
Property Insurance is based on the principle of indemnity. Indemnity refers to the compensation offered by the insurer purely to cover the losses incurred. When you file a claim, the insurer will study the cost of damage to the property and only pay the amount for those covered under the insurance policy. Moreover, for a higher sum insured, you’ll end up paying more premiums than is required. Therefore, a higher sum insured presents no particular advantage.
On the other hand, if you insure a sum lower than the actual value of the property, you will have to pay the difference and may also be charged extra for it. Even in such cases, the insurance company only compensates against the market value of the property.
Property Insurance: Key Points to Consider
The sum insured should reflect the total value of the property.
Include the cost of all items that form an integral part of your property to arrive at the correct valuation of the sum insured.
Do not over-insure or under-insure if you want to avoid paying extra out-of-pocket.
Remember to deduct the value of the land while determining the sum insured, as land cannot be damaged by some of the concerns listed above.
Do factor in inflation. While the cost of an asset depreciates over time, inflation ensures that the prices of newer versions keep rising.
If the insured property is jointly owned, each party gets a share of the claim amount as specified.
The sum insured also depends on the type of insurance coverage chosen. Some insurance providers offer separate policies for natural calamities, burglaries, explosions, riots, etc.
Conclusion
Buying a property today takes a large investment, and it becomes even more important to protect yourself with the best Property Insurance. Having invested crores in your dream project, keep a plan in place that indemnifies you against any damage caused to it. A Property Insurance plan with the right sum insured acts like a financial safety net for you to fall back on should anything happen.
As numerous factors contribute to fixing the sum insured, it can be tedious to figure it out on your own. Reach out to an insurance expert if you have doubts about how to fix the sum insured specifically for your property.
