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How much home insurance do I need?

Organising your home insurance can end up being nothing more than a box ticking exercise. But if you need to claim, miscalculations can lead to underinsurance – leaving you to cover costs. Here, we take a look at how to work out the level of home insurance you need so that you don’t end up out of pocket.

The difference between buildings and contents insurance

Home insurance is a generic term that describes both buildings insurance and contents insurance.

  • Buildings insurance – covers the structure of your home and will compensate you if it’s damaged or destroyed. This also includes permanent fixtures and fittings like pipes, drains, bathroom suites and fitted kitchens.
  • Contents insurance – covers all your belongings, in other words, all the items you bring with you and that make a house your home. For example, furniture, electrical items, pictures, rugs, kitchen utensils and crockery.

Both buildings and contents insurance cover events such as fire, flood and storm damage, subsidence, theft, and vandalism. If you make a successful claim, your insurer will compensate you with an agreed amount of money (known as the sum insured).

Do I need home insurance by law?

Home insurance isn’t a legal requirement so it’s not something you must have. However, if you have a mortgage, your lender can insist you have buildings insurance at the very least. It could even be a condition of your mortgage.

If you own your home outright, you’re not obliged to have buildings insurance. Nevertheless, remember that without insurance (either buildings or contents) you’ll be responsible for covering all repair costs.

How much buildings insurance do I need?

Your buildings insurance should cover the cost of rebuilding your home if it were completely destroyed. It might sound drastic, but fire damage (for example) can be devastating.

The rebuild cost is literally the amount of money it would take to build your home from scratch. It’s not the same as your home’s market value (or the amount you paid for it).

There are two main ways to work out the amount of cover you need for your home:

The bedroom rated formula

This bases the rebuild value on the number of bedrooms your home has. For most of us, this formula is more than adequate and will ensure you have enough to cover the cost of rebuilding. The downside is that as it’s a standardised formula, you could end up being over insured which would mean paying a higher premium.

Calculate your home’s rebuild cost yourself

If you prefer a more exact figure, you can specify a sum insured with your insurer. You can work this out using the rebuild cost calculator from the Royal Institution of Chartered Surveyors (RICS) and the Association of British Insurers (ABI). You could also hire a professional surveyor to work out the rebuild cost.

Calculating the sum insured yourself is likely to be more accurate than the bedroom rated formula, making your premium a better reflection of your needs. The drawback is that you’ll need to factor in inflation when you come to renew, otherwise you risk under insuring your home.

Which method should I use for my home?

If you live in a standard brick-built home with a slate or tile roof, the bedroom rated formula used by insurers offers a quick and easy solution. You can also use the rebuild cost calculator.

If your home isn’t standard (for example, if it has a thatched roof or is of timber construction) then it’s worth considering asking a surveyor to work out the rebuild value. A professional valuation will take into account any specialist materials and labour you may need which you might otherwise miss or forget to factor in.

How much contents insurance do I need?

The amount of contents insurance you need will depend on the value of your belongings. The sum insured you agree with your provider, should be enough to replace what you own.

There’s no quick way to do this properly and it’s likely to be a time-consuming job in the first instance. The good news is that when you’ve done it once, it should just be a question of reviewing the amount each year at renewal.

To make sure you don’t miss anything, go through every room in your home, making a note of what you own and how much it is. If you buy anything expensive, it’s worth keeping receipts which can make the claims process smoother.

What is the single item limit?

Your home contents policy will often have something called the single item limit (or single article limit). This is the maximum amount of money you’ll receive for any one item.

If you have anything particularly expensive – like a piano, engagement ring or other valuables, check that this limit is enough to cover those items. If it isn’t, speak to your insurer. Alternatively, you can insure high value possessions on their own policy.

Understanding indemnity insurance versus new for old cover

Another aspect of your contents insurance to be aware of, is whether or not it replaces old items with new ones. If it does, it will specify this in your policy documents.

If your policy doesn’t provide new for old cover, it’s likely to be an indemnity policy, also known as ‘wear and tear’. This means you’ll only be compensated with the current value of your belongings – not what you paid for them. For example, if you bought a £4000 sofa five years ago and it was damaged in a flood, an indemnity policy would pay out the value of the sofa now, which could be a lot less. A new for old policy would either try to replace the sofa with the exact same one or compensate you with the £4000 to buy a new one.

Needless to say, new for old contents policies tend to have higher premiums but this can work out better value in the long run if you need to claim.

How much does home insurance cost?

Home insurance premiums are determined by all sorts of factors. Fundamentally, it comes down to what you need, for instance, whether you want both buildings and contents cover or if you rent and only need your contents insured.

Insurers will also factor in the different sums insured for the building and your contents. If you’ve chosen to add any extra features to your policy (like accidental damage cover or emergency boiler insurance) then this will also be taken into consideration.

Having a recent claim can also affect what you pay. As far as insurers are concerned, claiming once increases the chances of you claiming again – which in turn can push up your premium.

Compare home insurance for peace of mind

Home insurance is a valuable safety net for those unforeseen events that get thrown your way. While there’s a good chance you may never need to make a big claim, there’s always a possibility that you might.

To help you find affordable home insurance, we’ve teamed up with QuoteZone. Simply answer a few questions about what you need, and we’ll bring you a range of quotes from leading insurers that suit you.