Inflation may eat away at your home insurance policy in the event of a disaster 27th March 2023
Inflation is a consistent and significant rise in the prices of goods and services over a long period in an economy. As the prices of goods in our consumption basket rise with time, so do our homes' construction and repair costs.
Inflation may also affect your home insurance policy in the event of a disaster. Besides the regular increase in raw materials prices, the labour cost also increases with time. Hence, we may find our house underinsured when making a claim. Our house insurance India policy should be adjusted according to the current construction costs at regular intervals.
1. Effect of inflation
While issuing a home insurance policy, insurance companies assess the probable cost required to rebuild a house. This is based on several assumptions. But they cannot consider the effect of inflation on the rebuilding cost in the coming years. It is a thing of the future and is uncertain.
Suppose your home insurance policy issuer has estimated the cost of rebuilding your house at 15 lakhs rupees in 2015 and provides coverage accordingly. By the time we enter 2023, the cost of rebuilding the same house has shot up to 30 lakhs rupees. This is because of the rise in building prices, construction materials, and labour wages over the years.
If your home insurance policy is not adjusted for inflation and your complete house is destroyed, you will get a reimbursement of only 15 lakh rupees from the insurance company. You must pay the remaining 15 lakh rupees for reconstruction from your pocket. This will prove very costly and cause mental and financial stress at the time of claim settlement.
2. Inflation rider
You should always add an inflation rider or inflation guard clause to your home insurance policy. With this rider, the insurance company will automatically adjust your policy's coverage limit, which is a fair reflection of the current cost of construction at the time of renewal. Thus, your home insurance coverage limit will grow with time and take into account the effect of inflation.
You will not be underinsured anymore and will be reimbursed in full according to the current cost of reconstruction if any mishap occurs.
3. Cost of inflation rider
Insurance companies increase the annual premium of your house insurance India policy when you add the insurance rider to it. However, this rise is usually lesser than the rate of inflation.
Hence, you should always opt for an inflation rider, even if you have to pay an extra premium. This will give you peace of mind and prevent you from suffering any significant financial losses later.
4. Exclusions
The inflation rider will not consider any value addition to your house because of renovations and other improvements. You have to first inform the insurance company about any such value additions to enhance your policy coverage. For such cases, the insurance company may increase the annual premium of your house insurance India policy.
Inflation is a persistent problem in any economy across the globe, and you need to take care of it. It can result in a sharp increase in the cost of restoration and renovation of your house in the event of a disaster.
Hence, you should be cautious about it from the start and regularly review your house insurance India policy. You can estimate the replacement costs, inform the insurance company, and purchase an insurance rider. This will come at a slightly increased premium, but it is absolutely worth it and will give you complete peace of mind.
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Disclaimer: The information provided above is for illustrative purposes only. To get more details, please refer to policy wordings and prospectus before purchasing a policy.