TheRateTart Home Insurance Guide
Contents
- Introduction
- How do home insurance companies make money?
- What is the difference between buildings and contents insurance?
- What factors will affect my buildings insurance premium?
- What factors will affect my contents insurance premium?
- How does buildings and contents insurance differ for landlords, tenants or students?
- Tips from TheRateTart
More than ever, it pays to shop around for your home insurance cover.
It's always been a good idea to compare prices, excess amounts and cover before you buy. But recently, some of the biggest insurance companies have started to identify customers who are "sticky" - people that do not move their business when premiums rise. This means that people who regularly change insurers will get lower renewal quotes than people that don't. In effect, loyal customers are penalised for their loyalty – just like the preferential "new customers only" deals offered by banks.
How do home insurance companies make money?
By picking risks carefully and by investing the money you give them when you pay your premiums.
Your home insurance policy is really a gamble. You bet the amount of your premium that something really bad will happen to make you claim. The insurance company bets it won't. If something bad does happen, you are covered within the terms of your policy and the insurance company will pay out. The insurance companies' job is to be right a lot more often than they are wrong.
Insurers always try to limit their exposures to certain types of risk (like flood damage or fire), and try not to insure too many homes in any one area. That way, if the worst happens, they won't lose their shirt when everyone claims all at once. So even if you live in a low risk area and you've never had a claim, your home insurance quote might be uncompetitive if your house is the 20th house on your street that the insurer covers. It always pays to shop around...
What is the difference between buildings and contents insurance?
Buildings insurance covers the structural components of your property and any outbuildings as well as the walls, roof & doors. Depending on your policy terms, this might include any fixtures and fittings that could not easily be separated (e.g. a fitted wardrobe).
Contents insurance generally covers the items inside and outside the house that you would expect to take with you should you move house (e.g. televisions, beds or garden furniture).
If you have taken out a mortgage on your house, your mortgage lender will insist that you have buildings insurance in place before they will release funds. This is because mortgages are secured against the property, and the mortgage lender needs to make sure that the debt owed to will be repaid even if the building is destroyed. If they didn't do this, the mortgage lender's only option would be to chase the home owner for the value of the outstanding mortgage. It's much easier for them to claim against the insurance.
Your mortgage lender has no financial liability for your contents and will be supremely indifferent if a burglar leaves you with nothing but an upturned box and a deck of cards. OK, not strictly true. Any mortgage lender worth their salt will see this as an opportunity to sell you their contents insurance.
What factors will affect my buildings insurance premium?
For most people, buildings insurance premiums are largely driven by the cost of rebuilding their property should it be destroyed. Importantly, this amount is not the same as the property's market value, which includes factors such as the cost of the land, location etc. Insuring your property for the market value may result in you paying for more than you need to. To work out the rebuilding cost of your property either check the initial surveyors report (if your home was built recently) or use the rebuilding calculator on the Association of British Insurers website.
Other than rebuilding costs, the major driver of buildings insurance premiums are geographical factors such as flooding risk or subsidence. Before purchasing a property check out whether it is at risk from these factors by using the Environment Agency's flood risk map. Also, consider getting a full structural survey done.
If you already own a property that is at risk look into what measures you can take to reduce the risk of damage and therefore your premium. Some modifications to consider are;
- Install valves to prevent sewage flowing backwards
- Look into putting temporary flood defences around your property
- Ensure documents and expensive or valuable equipment is stored in elevated parts of the property
- Move gas and electrical sockets above flood level
One final point. Some mortgage deals require you to take their buildings insurance as a condition of borrowing the money. As buildings insurance linked to a mortgage is usually relatively expensive it may be that the mortgage deal is not as competitive as it appears. It's long been the case that mortgage lenders offer attractive headline rates by clawing back their profit margin in other areas.
If you suspect this is the case, make sure you compare the Total Amount Repayable from the point of completion to the end of the longest Early Repayment Penalty (ERP) period. This should include the cost of monthly payments, any upfront fees, any mandatory add ons and any fees associated with exiting the mortgage. By doing this you will be able to compare like with like and see who is really offering the best deal. Visit our Mortgage Guide for more information.
What factors will affect my contents insurance premium?
Home contents insurance covers the cost of replacing the contents of your home should they be stolen or damaged. The list below will help you reduce the amount you pay whilst ensuring you retain adequate cover should the worst happen. It always pays to shop around because every insurer calculates risk in its own unique way, and quotes can vary a lot from insurer to insurer.
Total value of possessions has a big impact on your quote. It's easy to underestimate how much your possessions are worth, especially if you've accumulated things over the years. Its worthwhile spending a little time to go through each room and think about how much it would cost you to replace the contents. Don't make the mistake of only insuring things that can be stolen such as TVs and computers. If your house were to burn down you'd end up with no sofa to sit on whilst watching your replacement television! The Association of British Insurers provides a useful room by room checklist on their website to help with this. And, if your policy covers the cost of items in your garden, don't forget to include these as well.
When estimating how much cover you want, you'll also need to decide whether you want a 'new for old' or 'indemnity policy'. A new for old policy will generally be more expensive because it covers the cost of replacing everything with brand new items. An indemnity policy will pay out less because it pays out "like for like" - the individual amounts are reduced because of wear and tear and depreciation, and you are paid enough to replace them with items of equivalent value.
High risk or high value items include antiques, original artwork, jewellery. computers, watches, musical instruments and cameras (amongst other things). Make sure that you are covered for these items. You may need to tell your insurer about them specifically, and provide independent valuations, to be fully covered in the event of loss.
Location, location, location is reckoned to be the most important consideration in buying property. And it can also impact your home contents premium. Areas with high level of burglary will be viewed as a higher insurance risk and may have higher insurance premiums. If you are moving house consider using a site such as www.upmystreet.com to check out local crime levels against the national average.
Enhanced safety and security measures can help reduce your premium by offsetting other risk factors. Fitting a smoke alarm will reduce your risk of fire. Fitting a burglar alarm or security system and getting it serviced regularly, and fitting improved window and door locks will reduce your risk of burglary. Keeping jewellery and other high value items in a safe will reduce the risk of these being stolen in the event of a burglary. Apart from reducing your quote, anything that lessens the likelihood of having to deal with the emotional trauma of losing valuable and irreplaceable possessions may be a worthwhile investment.
No Claims Bonuses are becoming increasingly common on home insurance policies, and can result in you a reduced quote. It's worth checking to see whether your home insurance company offers this.
Excess is a fixed amount payable by the insured (i.e. you) rather than the insurer (i.e. them), if you have to make a claim. The majority of insurers will impose a compulsory excess on any policy. Increasing the amount of excess payable (your 'voluntary excess') could result in a significant reduction to your premium. If you believe the risks of your needing to make a claim are low and you could afford to pay a voluntary excess in the event of a claim, this may reduce your quote.
How does buildings and contents insurance differ for landlords, tenants or students?
Landlords, tenants and students typically have different insurance requirements to home owner-occupiers. This relates to the level and types of risk each is exposed to.
Buildings insurance is required by landlords as the owner of the property, but is not required by tenants or students. However tenants and students may want to consider taking out cover for accidental damage. This could protect the deposit in the event of damage to the fixtures and fittings, such as burns and stains on the carpet.
Home contents ownership tends to be split between landlord and tenants in rental properties. Consequently the amount of cover required by each is less than that needed by an owner-occupier. By getting a quote from a specialist insurer both parties should be able to save money compare to a mainstream provider.
Optional extras are available to landlords to reduce the impact of some of the specific risks they face. Rental guarantees provide cover up to a fixed amount in the event of tenants not paying. Emergency call out services provide cover up to a fixed amount for responding to specific incidents that require immediate attention. Although this will not cover problems caused by a lack of routine maintenance. These are likely to result in an increased premium, so before ticking the box consider to what extent you are exposed to these risks.
Tips from TheRateTart
Alternative accomodation whilst your property is repaired or rebuilt is included in some but not all buildings insurance policies. If you can easily stay with friends or family this may not be such a big problem. On the other hand, if you have dependents, you may want to check that the insurance company will arrange somewhere for you to stay.
Enhanced safety and security measures often need to be to of a standard approved by the insurance company. Typically door locks must conform to British security standard BS3621, whilst burglar alarms should be NACASS approved. Don't consider getting cheaper alternatives and lying to your insurer about the level of protection you have to get a reduced premium. In the event of a claim the insurance company will check this, and if false information has been provided they will probably not pay out. Similarly, some home insurance companies are now including a condition that security systems be activated whenever the property is left unoccupied. Even if you are only popping out to the shops, forgetting to turn the alarm on could mean your insurer refuses to pay out, or makes a reduced payment in the event of a burglary.
Maximum single item limit is the most your insurance company will pay out for any one item in a claim. This means that you could have contents insurance to a total amount of £100,000. But if the maximum single item limit is set at £1000, you will not be fully compensated for your state of the art £2000 LCD television - even if that is the only thing you claim for. Make sure you check what the limit is and tell your insure about any items over this amount separately.
Accidental damage cover is an option on most home insurance policies. If your LCD television is damaged as a result of a burst pipe pouring water on it, its likely that you will be able to claim without accidental damage cover. But if your five year old embeds their cricket ball in the screen, you'll be hoping you remembered to tick the box for accidental damage cover.
Liability cover ensures your home contents insurer will pay out if an accident in your property causes damage to an adjoining property. For example, if you cause damage to the flat below by letting the bath overflow, you should be covered.
Freezer cover pays out for the contents of your freezer if they are ruined due to a power cut or other reason. If you have a large amount of steak and salmon on ice or regularly feed hungry hoards this may be worth having. It's probably not economical for a couple of burgers and half a packet of fish fingers though.
Legal Expenses Cover pays your court costs if you are sued after someone injures themselves in your home, or if a neighbour's tree causes damage to your property. Its not clear how this would work if your neighbour was injured by their own tree whilst visiting your property. But the lawyers would have fun.
Paying monthly can cost you extra. Some insurers will impose a 'credit charge' for the privilege of paying monthly. Essentially this allows the insurance companies to claw-back the money they would have made if the full premium had been in their bank account from day 1 of the policy, plus administration costs, plus a profit margin for offering the service. If you plan to pay monthly take this into account when assessing the competitiveness of your premium. You may be better using other sources of cheaper credit. See our Credit Card guide for details.
Portable items such as mobile phones are increasingly at risk of theft or damage outside the home. Check whether your home contents insurer provides cover outside the home and if so what items are covered.
Don't pay more than you reasonably need. Remember, opting in to any or all of the above will push up your insurance premium. Take time to consider your specific circumstances and exposure to the relevant risks. Only sign on for those options where you feel your risks are higher than you are comfortable with.
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