The basics of home insurance and how to find a good deal

There are a host of home insurance policies offering value for money as long as you know what to look for and how to keep your costs in check.

With average costs increasing – buildings insurance premiums alone have risen by 9.8 per cent in the nine months to October 2009 according to the AA British Insurance Premium Index – it’s arguably more important than ever to understand how home insurance works and how to find a competitive deal.

What is home insurance?

As a home and its contents are likely to be the most expensive investments of anyone’s life, it’s vital to protect them against a host of risks. This is where home insurance comes in.

Broadly, home insurance covers two areas:

-         Buildings insurance: Covers the structure of a home and its permanent fixtures and fittings. Many lenders insist that property owners take out buildings insurance when they obtain a mortgage, but it is not essential to take out the cover they offer – you are entitled to shop around. Typically, buildings insurance covers damage caused by storms, flooding, fire, subsidence and theft. Many policies also incorporate cover for outbuildings, as well as accidental damage to underground pipes, cables and glass in windows and doors.

-         Contents insurance: Contents insurance will typically cover everything that could be moved in and out of a home – such as furniture, household goods, electrical items, personal valuables, clothing, carpets, curtains and more. Policies typically protect these items against theft, damage or loss as a result of a water leak, flooding, explosion or even if a home is vandalised. Most insurers will also offer some degree of accidental damage cover.

Many home insurers also offer additional protection – usually for an added cost. This can include cover for legal expenses, extended accidental damage cover, home emergency cover, pest control and personal possessions cover to protect items you take out of the home.

How much home insurance cover do you need?

The sum insured is the amount of money your home is covered for and is the maximum amount a home insurance company will pay out regardless of the claim.

When you take out cover, an insurer will normally ask a series of questions to assess your premiums which means you will generally have to provide your own valuations of your property and it contents. Underestimating their value could leave you out of pocket if a claim is necessary, while overestimating will mean you’re paying more on your premiums than you need to – so it’s important to get the valuations as accurate as possible.

With buildings insurance, remember you are assessing the rebuild value of a home and not its market value. The rebuild cost can normally be found on a mortgage assessment and this should be index linked in line with inflation. Clearing of the land and surveyor fees should also be incorporated. The Association of British Insurers’ sum insured calculator can be used to assess how much to insure your home for.

In terms of contents, make a list of all your possessions with their cost. Go through your household items room by room and bear in mind that most insurers will place a maximum limit on individual items – typically around £1,500, so possessions that exceed this value may need to be listed separately on the policy.

Is there anything else to be aware of?

Here are some more considerations before you buy a home insurance policy:

-         Excess: Most insurers set a compulsory excess – an amount you have to pay if a claim is necessary. On top of this you can normally agree to pay a voluntary excess – setting the voluntary excess at a high level could cut premiums but it should only be set at a level you can comfortably afford.

-         Exclusions: Examine the terms and conditions of a policy before you buy and look out for exclusions – risks that insurance companies won’t pay out for. These can include losses from terrorism, pollution and contamination. Most insurers do not pay out if you have incorrectly described your locks, or failed to use a burglar alarm only for a home theft to take place.

-         Payment methods: Most home insurance companies give consumers the chance to pay for premiums monthly, but paying in this way will usually incorporate interest charges so it can be more cost effective to pay annually.

How to find a competitive deal

To find a competitive home insurance deal, use a comparison website. Most insurers offer their cheapest deals online due to the savings they make on overheads and the leading comparison websites typically compare deals from more than 50 insurers helping the consumer find a cost-effective policy. Remember however, to look beyond price alone and consider the level of cover you’re taking out.

There are several ways to cut premiums without sacrificing your cover including:

-         Increasing security: Consult your insurer about home security devices such as burglar alarms and time-switch lights. Most insurers also offer discounts if you fit approved locks and join a Neighbourhood Watch scheme.

-         Reducing fire risk: Fitting smoke alarms and fire extinguishers in a home, and quitting smoking, could help you save.

-         No-claims discount: Most insurers offer no-claims discounts based on the number of years you have gone without making a claim. This could cut premiums by as much as 60 per cent after five years.