The Society for Chartered Surveyors (SCS) released their annual Guide to House Rebuilding Costs recently and at its launch, they claimed that people are still insuring properties for more than they need to, and in many instances people are paying for cover they can never claim for.
Of course what this means, is that people are paying more on their home insurance policies than they need to. And the reason for this, the SCS has advised, is largely down to people insuring their property for its market value i.e. what they estimate they would receive if they sold the property, rather than insuring it for its re-instatement value i.e. the amount required to rebuild the exact same property if it was destroyed. Fortunately you have a terrific resource available to you which will help you determine what your property should be correctly insured for, if you log onto the SCS’s website (www.scs.ie) They have an excellent house rebuilding guide, and they even have a calculator that will tell you exactly what your house should be covered for – the landing page for this calculator is below and I would encourage people to check it out, because it really is an excellent resource - www.scsi.ie/advice/house_rebuilding_calculator.
I wanted to see how much you could save by insuring your property for the correct amount, so I looked at some four bedroomed semi-detached properties currently for sale in Limerick. I picked one in the Ennis Road area which had an asking price of c. €255,000. The property had a square footage of 1,200 and if you were to insure it based on the SCS guidelines, then that amount would be c. €160,000.
So, knowing what the market value was and what the re-instatement value was, I next contacted an on-line insurance provider, where I submitted the details of the property and the results that came back were as follows:
Sum Assured | Annual Premium
€160,000 | €301.55
€255,000 | €374.35
So, you can see, if you insure the property for the incorrect amount, you end up paying €72.80 more in this instance each year than you need to. That is 19% more on your annual home insurance premium each year than is required. And I admit €72.80 is not exactly a life changing amount, but that is not the point, the point is having the right level of cover in place and not paying any more than you need to.
What was also interesting for me when I was comparing quotes based on different amounts was the effect the policy excess was having on annual premiums. And the policy excess is the amount you have to pay if you decide to make a claim on your policy. If for example your home was damaged by bad weather and the cost of repairing the damage was €1,000. If your excess was €250, then you would pay the first €250 to cover the cost of repairs and the insurance company would pay the remainder.
When I was getting those quotes on-line, and when I changed the policy excess and increased it from €250 to €500, the premiums reduced by 13%. So, there are now two ways you can reduce your annual home insurance premiums and they are (a) insure your property for the correct amount and (b) increase your policy excess.
I think it makes sense to use your own savings to cover the increased excess amount because if you ever did make a claim, you will see your annual premiums increase by between 20% and 30% over the following years. And knowing this is important, because if you know not to file a claim for less than €500, because the impact it will have on your premiums going forward, why would you have a small excess on your policy?
What you should do if you did increase your policy excess from €250 to say €500 or €1,000 in order to take advantage of lower premiums, is set aside the difference into an interest earning account (the best instant access accounts are currently paying about 0.70%) and this amount will cover your out of pocket expenses in the event of your house being damaged. Your existing premiums will immediately reduce and you are preserving your no claims history – this is a good strategy in my opinion.
And you don’t have to wait until your existing home insurance policy is up for renewal to start making those changes either. The first thing you should do is take out your current policy schedule and see how much your home is actually insured for, and what the excess amount is. Once you know this figure, you will know whether you are over or under insured. Next, call you insurance provider and ask them to re-quote you based on what your property should be insured for and enquire about what impact increasing your policy excess would have on your premiums as well. And while you are talking with them, ask if discounts for having an alarm and smoke detectors are being applied to your policy as well. Once you know what your new premium is from your existing provider, I would go on-line and compare this against others in the marketplace – just because they may have reduced your premium because you have insured your property for the right amount and or increased your excess as well, should you assume the new premium can’t be lowered even further.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie