HERE is questionI am frequently asked on home insurance, from people who are looking at making a small claim, for whatever reason: “is it worth making the claim at all?”
The reason they ask is because they are worried the impact it might have on their future premiums.
And they are right because if you have a claims history, regardless of how big or small the claim was, it will impact your future insurance premiums, which could stay higher for up to five years from the date the claim was first made.
I wanted to find out exactly what monetary impact this would have on monthly premiums so I contacted a very well-known insurance provider this week and I asked them to give me some quotes based on insuring a property for €300,000, contents cover of €50,000 with a policy excess of €250 (this is where the first €250 of any claim is paid by you rather than the insurance company). I also told them I made a small claim last year for water damage from a burst pipe.
The premium they quoted me for the year was €468.44.
I then asked them if I hadn’t made a claim in the last number of years, would this impact my premium. And they said yes it would – if I hadn’t made a claim in the last three years my annual premium would be €388.62 and if I was five years claim-free my premium would be €367.55.
So, if you have made a claim within the last three years, it would result in your annual premium increasing by 21% and a claim within the last five years would see your premium increase by 27%. Based on these numbers, it showed to me that financially, in this example that it is not worth making a claim for anything less than €500.
And knowing this amount is very important, because if you now know not to file a claim for less than €500, why would you have a small excess on your policy?
Increasing your policy excess from €250 to €500 would see your premiums reduce by 4% and 6% if your excess was €1,000. So, if you are looking at ways of saving on your annual premium then this is a simple way of achieving it without it having any significant impact on your policy.
What you should do if you increase your policy excess to say €500 or €1,000 in order to take advantage of lower premiums, is to set aside the same amount into an interest earning account (the best instant access accounts are paying about 1.75%) and this amount will cover your out of pocket expenses in the event of your house being damaged.
Your existing premiums will immediately reduce, you are preserving your no claims history and keeping your new lower premium protected going forward and the money you have set aside for any accidents is earning a reasonable rate of interest. This is a good strategy in my opinion.
In the UK, statistics are showing each year that more and more people are doing what I am saying and opting for a higher voluntary excess each year and taking advantage of lower annual premiums.
People are also not making as many small claims anymore (10% reduction since 2008) because they know the impact it will have on their following year’s premiums and they have also found out trying to shop around to get a lower premium will make no difference.
Now let me ask you a question. How much is your house insured for and how did you arrive at the figure?
I will tell you shortly how much you should insure it for, but before I do, many people under-insure their property to save on their annual premium. I absolutely get why some people do this, but for many they don’t realise the impact of what they are doing.
If, for example, a house was insured for €300,000 and a couple wanted to reduce the level of cover to say €150,000 because their monthly premium will reduce (by €10 by the way). If anything was to happen to their house that caused let’s say €100,000 worth of damage, they might think not a problem, we still have more than the amount we are going to claim for even after reducing our level of cover. Wrong!
There is a thing called the Average Clause in an insurance policy which states that an insurance company will only pay a proportional amount of the actual value of a property.
The effect that this would have on the couple I was just referring to would be that when they made a claim for the €100,000 worth of damage, their insurance company would say that the true re-instatement value of your property is €300,000 and you are only insured for €150,000, half the real amount – so we are only going to pay 50% of any valid claim you make. Which means the insurance company would only pay them €50,000, leaving them €50,000 short – all for the sake of saving €10 a month.
The insurance company can justify this because their argument is why should they take the risk because you choose to under-insure the property by paying a premium on an amount less than what the house is valued for and expect to be paid out on the full amount you are claiming for?
So, being aware of this is not to be underestimated because you can see the impact it could have on future claims being under-insured and thinking that is OK – it clearly isn’t.
What, therefore, should your house be insured for?
There is an excellent website from the Society of Chartered Surveyors that you should check out – www.scs.ie – and when you look at this site you will find in their House Rebuilding Guide 2014 what the cost to rebuild different types of properties in Limerick is.
It will show you, for example, that a three-bed semi-detached property in Limerick should be insured at an amount of €128 per square foot, so, if you did own a three bed semi-detached property with a square footage of 1,100, then the amount your house should be insured for is €140,800 i.e. 1,100 x €128.