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Insurance advice - first time home owners

Buying your first home is an exciting, if not daunting time. There are many financial considerations that come with your first foray into property ownership, including the essential insurance covers for your property and household contents.  

“Many prospective home buyers forget to factor the cost of insurance into their monthly bills, and yet your insurance premiums will be a reality for as long as your house is financed, and in fact, as long as you live in the property,” says Mandy Barrett of leading insurance brokerage, Aon South Africa.

Homeowners insurance protects your actual property, the bricks and mortar structure, while householders insurance protects the contents and movable items inside your home such as furniture, appliances, clothes and personal effects.

Location

“Location is a very important consideration.  Most standard homeowners policies will cover your property for the usual perils such as damage incurred as a result of natural causes such as heavy rain, wind storms and lightning strikes and of course theft and burglaries subject to you having prescribed security measures in place.  

However, if you live in an area that is more likely to be hit by floods, for example on a river bank, or is more exposed to perils such as landslide and subsidence, your home insurance policy may exclude any claims as a result the likelihood of such incidents, or add an extra loading to your premium.  You may be under the false impression that your home built against the mountainside is covered for the landslide and subsidence, when in fact it is not.  Understanding the exact exclusions and inclusions for that matter, of the policy wording is crucial,” says Mandy.

“A house located in a security complex/estate or boomed-off residential area with 24-hour security and added security measures such as an electric fence, alarm and outdoor motion sensors linked to armed response, along with the mandatory security gates and burglar bars on all opening doors and windows, will attract a much lower premium than a stand-alone property with no extra security precautions,” explains Mandy.

Type of structure and state of repair

“The type of structure of the house will also have an impact on the cost of your cover.  For example, a thatch roof house is significantly more expensive to insure than a standard tile roof due to the higher fire hazard that a thatch roof poses.  In fact, any thatch structure on your property such as a lapa could have an impact on the cost of your insurance cover depending on whether it is attached to the main building or the distance it is from the main building.  It is essential that the actual plans for the lapa building are logged at the deeds office and approved to avoid any possible repudiation of claims.  Extra safety precautions will also need to be implemented to get cover, such as regular fire retardant treatments and lightning conductor rods.   

“The condition of the property will also affect your insurance premium rating.  Plumbing, wiring and gas pipelines will affect your ability to get cover if deemed to be unsafe or in a poor state of repair.  Remember that insurance does not cover wear and tear or any damage as a result of a lack of maintenance.   It is essential to perform maintenance and keep your property in a sound condition to ensure a smooth claims experience.  It is always a good idea to assess a property’s condition before you buy it and ensure that it meets the prescribed engineering-based building codes.  A reputable mortgage lender will be able to arrange this for you and advise you of any potential hazards or pitfalls before you sign on the dotted line,” explains Mandy.

Credit Rating

Your credit rating could also have an impact on your insurance rates.  Before you apply for home insurance, get copies of your credit reports and make sure they are accurate.  If they contain any mistakes, immediately take steps to rectify them.  Your credit rating affects all aspects of your financial planning and a poor credit record will impair your ability to get finance or credit, including insurance cover.

Household contents

South Africa is more exposed than most countries to loss from the likes of crime, burglary, vehicle claims, car hijacking, theft and so on, and yet insurance industry statistics show that about 40% of insurance policyholders are dramatically under-insured, a figure that could be growing as household budgets come under increasing pressure. “This poses the risk of serious financial loss and the temptation to reduce covers should be strongly resisted.  Frequently, it’s not just a matter of home theatres, Raybans, clothes and the like being under-insured, but often major possessions such as cars, household possessions, consumer electronics and property are not properly covered either.    What this means is that, in the event of a claim, you are likely to be paid out only partially for the loss. That’s because of what the insurance industry describes as the “average” formula and it works like this:

“If you insure your household contents for R250 000, but in fact their replacement value is perhaps double that amount, you are effectively 50% under-insured.  Should you suffer a loss of say, R100 000, the insurance company will therefore pay only 50% of the claim at R50 000 and you are left out of pocket for the balance.

“And don’t forget that the cost of replacing investment items such as art and jewelry - the price of gold and platinum has soared in recent years - and art sales in South Africa are realising record prices.  So that Maggie Laubser on your wall that you picked up quite inexpensively 15 years ago may now be worth a great deal more.  While a work of art can’t be replaced as such, its market value has to be built into the calculation of your cover for household contents.  And don’t forget the cost of curtaining, expensive Persian carpets, designer lounge suites and clothing. It all adds up,” says Mandy.

And remember, as the years go by, you need to take into consideration that building replacement costs of your property will increase significantly, in spite of the general slowdown of market values.  Take the example of a home bought 20 years ago for R500 000. As building costs have increased over the years, its replacement value has appreciated accordingly to, say, R2 500 000 at today’s prices. If the sum insured is not increased to reflect this increase, the under-insured component could be as much as R2m. Bond insurance would cover the original loan from the bank if the home was financed in the typical way. That cover is adjusted annually by the bank but it will almost certainly not match the construction replacement value of the property at today’s costs,’ says Mandy.

A few closing tips from Mandy:  
  • Insure the contents of your entire house, not just what you think may be stolen in a burglary. Revalue your insurable goods every 12 months at least and adjust your cover accordingly.  Keeping an asset register is an invaluable tool in this regard.
  • Make certain you are insured at replacement value – unless you are happy to take a risk on having to make up the shortfall in the event of a loss.
  • Add valuable new purchases and gifts to your policy description.  Have family heirlooms and art work valued and take out specialist cover where needed.  
  • Should you have a claim, you must notify insurers within a reasonable time – check your policy wording for details – late notification could lead to your claim being repudiated.  
  • Make sure you comply with your policy conditions regarding minimum security, for example, a burglar alarm, burglar bars and security gates.  And remember to activate your alarm whenever you leave the property as failure to do this in the event of a burglary could see your claim repudiated.
  • You must have what’s known as an ‘insurable interest’, i.e. a financial interest in the insured asset. The assets of family members or independent children who no longer live with you or property owned by a CC or Company won’t be covered under your policy.  
  • Material change in the risk - insurers must be informed of any ‘material increase’ in the risk they are covering.  For instance, with home building costs continuing to escalate, the replacement value of homes has increased. Another example would be the erection of a thatch lapa attached to a standard roof, which increases risk.  Even if you simply make alterations to your home you will almost certainly add to its value and, for that matter, there could be risk of damage during construction.   
  • Employ a professional broker to negotiate the best deal for you – remember your individual circumstances can influence the rates you are charged and if you combine motor cover with household cover you get a better overall rate.  Your broker also has specialist knowledge that you won’t have, that will prove invaluable in the event of a complex claim that calls for negotiating with an insurer.  








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