Your money-making expert. Financial journalist, TV and radio personality.
Home insurance can be a really confusing area. How do you know if you really need it? What type should you go for? What does all the lingo actually mean and how can you keep the cost down?
In this guide we explain what you need to know…
Home insurance is insurance that covers your house and the possessions contained within it. The phrase ‘home insurance’ actually covers two different types of insurance: buildings insurance and contents insurance.
If you’re a home owner, you can get these two types of home insurance together in one policy, protecting both the structure of your home and all your possessions. You can also buy them separately.
If you don’t own your house, you don’t need to fork out to insure the structure (the buildings insurance part) – that’s your landlord’s job.
However, you do need a contents insurance policy to protect your furniture, clothes and other possessions.
If you’re a homeowner, having buildings insurance will often be one of the conditions of your mortgage. If you’re renting, you don’t need it, so skip to the contents insurance section here.
What does it cover?
Buildings insurance covers the main building of your house and can be extended to cover the garage, fences, shed, walls and even the swimming pool if you’re lucky enough to have one.
Be aware that there are often lots of exclusions when it comes to extras like these. Insurers don’t like covering gates and fences for storm and flood damage – and other extras will often not be covered unless the main structure of your house is affected. Always check your individual policy to be sure.
Despite exclusions, a good buildings insurance policy should cover you for fire, flood, subsidence, storms, lightning, theft or vandalism, escape of water and oil (they’ll pay for damage caused, but probably not to fix the tank) and damage caused by falling trees, branches or other objects.
If you can no longer live in your house because of damage, your insurance will also cover alternative accommodation costs.
Don’t forget about the garden!
Research from Virgin Money reveals that one in seven gardens every year are victims of theft. We Brits love our gardens, spending more than £4 billion per year on them. Despite this hefty investment, many of us have failed to get appropriate cover from our home contents insurance policy. Whether it’s your garden gnomes, those brand new power tools or that snazzy BBQ you’ve just forked out for, there are a surprisingly large number of items to steal from a garden.
Firstly, ensure that your insurance covers items stolen or broken in your garden, then take some preventative steps.
There are around 200 house fires every day in the UK. Despite this, a frightening 46% of householders haven’t installed a smoke alarm, according to recent research from Halifax. In 2009, Halifax handled over 2,000 fire damage claims costing a whopping £19 million in total to repair. It’s vital to have home contents insurance to protect against this kind of damage but you can also take some preventative steps:
How much should I insure my property for?
No matter who you buy your insurance policy from, you are responsible for calculating what is known as the ‘sum insured’.
For buildings insurance, this is the amount it would cost to completely rebuild your house. Don’t get this cost confused with how much your house is worth (i.e. how much you would sell it for) as that is probably a higher figure.
Calculating this figure may seem daunting, but handily the Building Cost Information Service has a calculator that will do all the leg work for you – for free.
You have to register to use the calculator, but if you leave the box to receive more info from BCIS unticked, you won’t get any spam.
You then enter the external area of your house. You do this by going outside and measuring the width and the length of your house, then multiplying the results. This will give you the ground floor area.
If you have two storeys you’ll need to double this. And if your second storey is a different size, you’ll need to do a separate calculation for that storey and then add it to the total for the ground floor. If you have three storeys, you only need to calculate 70% of the third storey’s area.
Once you’ve calculated the external area, you input the type and age of the property, where it’s located and the cost of rebuilding any outbuildings.
You need to do the cost calculation for any extra buildings – like a garage – before you do the calculation for your whole property in order to know what the extra cost will be.
Finally, choose whether the policy should be index-linked (linked to the retail price index) and press go.
The site will then give you a clear report on how it has calculated the costings and the final amount necessary for a full rebuild.
Do I need to update the ‘sum insured’ during the year?
If you don’t make any structural changes during the year, you don’t need to make changes. However, when you’re renewing your policy you will need to do a new calculation to take into account the rising price of materials and other building costs.
If you have an indexed-linked policy this will take into account inflation and the rising (or falling) value of your house – so you won’t need to do updated calculations.
Just remember that you should always review your insurance policies every year to see if you are getting the best price – even if they are index-linked.
If you make any major structural changes, you will have to consult your insurer. If the area of your house increases because of an extension or building work, you’ll probably have to take out more cover to protect it all.
The contents of the average home in the UK are thought to be worth more than £40,000. If you have any possessions of value, contents insurance is a must-have.
What does it cover?
Contents insurance covers anything of value that is not a fixed part of your home.
This includes a huge number of things, including clothes, shoes, furniture, luggage, sports equipment and even the contents of your fridge. You can even choose to include items from your garden in your contents insurance.
Policies can also cover items that you take out of the house like a bicycle, iPod or laptop. Valuables such as these – plus sporting equipment, jewellery and any expensive gadgets – need to be properly declared when taking out your policy as they often require extra cover.
Your insurer may have different terms for items above £3,000 in value, or they may want to take them into consideration when calculating your premiums. You’ll probably need to provide either receipts or valuations for these items.
You can also choose to pay for a policy that will cover you for legal expenses. This includes the cost of access to legal advice, as well as the legal costs of pursuing a claim for compensation after an accident that wasn’t your fault or pursuing or defending other actions.
Are there different types of policy?
Most contents insurance policies are ‘As New’ or ‘New for Old’. This means that no matter what the state of your possessions, the policy will cover the cost of replacing them with new items.
However, if you want to knock money off your premium you can choose to go for an indemnity policy. This is cheaper for the insurer as it takes into account the degradation of your possessions, caused by wear and tear, over a period of time.
So for example, if your sofa is five years old, you’ll receive enough money to replace it with another sofa of a similar age.
What amount of cover do I need?
As with buildings insurance, you are responsible for the ‘sum insured’ or the cost of replacing all your possessions, should the worst happen. The lower this is, the lower your premiums will be.
Insurance companies will not pay out any more than the ‘sum insured’. So you must be sure that your calculation is enough to pay for you to completely refurnish your pad – and replace all your possessions – should it be burnt down or flooded.
You might think it’s a good idea to underestimate the value of your stuff, in order to keep your premiums down. However, insurers will often come to your home and do their own independent valuation.
For example, let’s say you’ve valued your possessions at £25,000 but they’re actually worth £35,000 (a 28.5% difference).
If your insurer finds out, the chances are it will only cover you for the cost of replacing your possessions, minus 28.5%. So, if your flat screen LCD TV is stolen, and it’s worth £1,000, your insurer will actually only cover 71.5% of the cost – £715.
How do I calculate the amount of cover I need?
The Association of British Insurers have a handy guide to help you calculate the value of your possessions. Just remember not to scrimp, as being under-insured can be disastrous.
Go through the rooms in your house and fill out the form at the back of the ABI guide, detailing all your possessions. Make sure you include absolutely everything – even the things you think are practically worthless – as it all adds up.
Don’t forget the carpets, wooden flooring, curtains and blinds – these cost to replace too.
You’ve then got to start on the mammoth task of finding out how much it would cost to replace each item. Keep your estimates rough but not too rough – if you don’t know how much something is worth, have a look around on the internet and you’re bound to find an equivalent with a price online.
You also need to make a specific note of anything really valuable to declare.
Then you can add it all up and that’s your valuation. Make sure it’s not more than the maximum cover offered by your policy. If it is, you might need to buy extra cover or change your policy.
Remember to read the small print carefully when choosing a policy. For example, there might be specific conditions relating to the wear and tear of your possessions, so it’s worth having a look at what they are.
Do I need to update the ‘sum insured’ during the year?
Every time you buy something new or get given a snazzy present worth a lot, you need to make sure that you are still within your cover limit.
You can either work it out yourself, or make a quick call to your insurer with the details of the item and its valuation. They will tell you if that item exceeds your cover and if so, how to top your cover up.
The ‘excess’ is the amount of money that you have to cover should you make a claim. Any remaining costs above the excess will be covered by the insurance company.
The excess on different policies varies, but it’s typically around £50. With subsidence claims however, it’s probably going to be £1,000 or even more.
If you’re seen as a risky insurance proposition, your insurer may ask you to have a higher excess. Alternatively, if you actually choose to pay a higher excess, it can reduce your premiums.
When deciding on the excess you’ll pay yourself, you need to balance up the risks – if you don’t need to make a claim, you could save money by having a higher excess. However, if your home or belongings do end up being damaged, you’ll have to foot more of the bill.
To get lower premiums, you should make sure that you take the following action:
The more lock-friendly your house is, the more secure it is and the lower the premium you’ll pay. All locks should conform to the British security standards BS3621 (that means they can only be opened by a key).
These reduce the risk of a break-in and therefore help keep your premiums low.
Do all you can to make things difficult for burglars. If you live on the ground floor, grow hedges and prickly shrubbery outside the windows.
Fences, gates and doors should be properly maintained. Bars on windows are also essential for most basement and ground floor flats, particularly in cities.
Some insurers charge interest on instalment payments, which makes the whole process more expensive. Others don’t though, so it’s worth checking your policy.
If you are going to be charged interest, try to either pay upfront for the whole year, or buy your home insurance on a 0% purchases credit card and pay it off gradually without paying any interest.
Most home contents insurance policies have a section that you can fill in which insures individual items separately. They can even be insured when they are out of the house.
So, for example, if you have some bits of expensive jewellery that you wear regularly, or even prescription glasses, you should insure them individually so that if you lose them in the street you can get the money back.
Remember to always shop around for the best deal, make sure you compare prices and policies to make sure you’re getting the right level of cover.