The truth about home insurance

Ever wondered how your insurer decides what to charge you for cover? Barney McCarthy finds out

Once you have taken out a mortgage, paid all the relevant fees and received the keys for your new home, the last thing you want to think about is added expenditure. But fail to take out insurance when you become a homeowner and you could be faced with a much bigger bill when you have to replace all your worldly goods after a break-in.

But even before you start to think about insuring your belongings, you will have to take out cover for the actual property, known as buildings insurance. Lenders will not allow you to take a mortgage without it. This may seem inhibitive, but think about it from their point of view: if you take out a £180,000 mortgage on a two-bedroom house, the lender’s security if you default on repayments is the property itself. If this is damaged or destroyed due to fire damage or subsidence, for example, without insurance you are left without a home and the lender will also have to say goodbye to £180,000.

Once the actual structure of your home is covered, you will need to think about insuring your contents. While this is not essential to your mortgage completing, as buildings insurance is, you should take it out for peace of mind. Sometimes it can even take a lucky escape, such as an attempted break-in, to make you realise the importance of being covered. But what factors affect your insurance premiums and what should you bear in mind?

Paying a premium

Research published this week (31 March) by actuarial consultancy EMB named the London borough of Islington as the most expensive place to be insured in the UK. The findings revealed high levels of violence and drug-related crime have impacted on insurance premiums, with burglary in the area three times the national average.

Karl Murphy, partner at AMB, says insurance premiums are typically higher in cities than rural areas because of the combination of high crime and unemployment rates. “About half of a contents’ premium will be based on the likelihood of theft,” he says. “Quite simply, Islington has a high density of young, unemployed males and it is this section of the population that is most likely to commit crimes against property. Islington is also an area which is prone to subsidence, another big factor in the pricing of household insurance policy prices.”

Insurance providers look at customers’ risk profiles in the same way that banks look at credit records. Before you take out a policy they will ask personal questions such as whether you smoke (which increases the risk of fire) and whether you have been broken in to before which will probably mark you out as a higher risk.

Simon Lamble, product director at comparison site Confused, says its research shows that a lot of people buy insurance from their mortgage provider for the sake of convenience and don’t realise the money they could save by shopping around. He continues: “Another common mistake is underestimating the value of personal possessions. Most people undervalue by about a half, by simply guessing rather than compiling a detailed inventory. People think about televisions and jewellery but forget to take CD collections and clothes into consideration.”

While people may underestimate the worth of their goods, Lamble says that insurers often over-estimate the cost of rebuilding a property and this is reflected in higher buildings insurance premiums for consumers with higher risk profiles. Confused publishes a list of top tips when it comes to home insurance to help consumers keep their premiums down. Installing better security and burglar alarms, and joining a neighbourhood watch scheme can keep your contents insurance down, while fitting smoke alarms, trimming back large trees to avoid subsidence and installing fire extinguishers can help with buildings cover.

Shop around

As with most things in life, it pays to shop around to get the most suitable and affordable cover. Don’t feel compelled to take out insurance with your mortgage lender, or to take out both types of cover with one insurer as you may well save money by obtaining them separately. Ascertain the rebuild price of your home and accurately assess the value of its contents to make sure you are not paying too much or facing a shortfall. Take on board the advice of your insurer when it comes to home alterations and even the smallest changes could save you a packet in the long run.