You may have seen your premium increase recently. One reason for this could be because your policy is index linked. An index linked policy keeps pace with inflation and other factors connected to rebuild costs.
Building costs have increased due to manufacturing and supply issues caused by Brexit, the slow down of production and distribution due to Covid-19, and the war in Ukraine.
Index linking accounts for increased prices of the following:
You will also need to consider and factor in the replacement of kitchens and bathrooms as well as outside areas such as walls, boundary fences, driveways and pathways and outbuildings or garages.
Index linking helps protect against underinsurance by making sure your sums insured keep in line with the rate of inflation and other factors (for example, global events such as Brexit and the invasion of Ukraine).
Underinsurance means you do not have the right level of cover for your home and contents, which could result in you paying more in the event of a claim.
Your insurer’s rebuild calculations based on index linking, will provide a far more accurate figure of a rebuild cost compared to an estimated value based on inflation or the current market value. Insurers use this figure to make sure the rebuild sum insured figure is as accurate as possible to prevent underinsurance.
If your home is destroyed due to fire, flood or subsidence, for example, the cost of reinstating the property needs to reflect the current rebuild costs. If you’re not adequately covered, you could run the risk of being underinsured.
A common misconception if you are underinsured is there will be a shortfall of perhaps a few hundred or a few thousand pounds which you would pay; and your insurer would pay the bulk of the rebuild as you are insured. This is an incorrect assumption. This is because the “average clause” would apply.
The “average clause” in an insurance policy is a clause that requires you to pay the proportion of any loss or shortfall, should the asset insured be covered for less than the full reinstatement value.
If your property is insured for less than the cost it would be to rebuild, repair or renovate it, your insurer will only pay out a reduced percentage of your claim which factors in the percentage it is underinsured for.
This protects insurers from clients insuring their property or contents for less than the cost to replace them, so that the client saves money on the premium. In other words, underinsuring your property is ‘false economy’.
If your building’s sums insured is: £400,000 but the actual cost of the rebuild sum insured = £800,000 (factoring in materials etc. as stated previously), your property will be underinsured by 50%.
The insurer will reduce their claims pay out by 50% and you will need to cover the rest of the costs.
The only way to make sure your property’s sums insured is accurate is to have a rebuild survey carried out. There are various companies which provide accurate rebuild surveys across the UK, enabling you to establish an accurate rebuild figure for your insurance purposes.
Index linked policies provide better protection against rising costs and inflation. Although the premium could be higher, it gives you peace of mind that providing you have set the correct rebuild cost of the property at the outset, you will be correctly covered.
There are various additional options available to you to ensure your home is properly insured, such as ‘blanket sums insured’ or ‘day one uplift’, so talk to us if you would like to make sure you are adequately protected.
To make sure your sums insured is in line with the rising cost of building materials and inflation in general when you renew your buildings insurance, and to make sure you’re not underinsured, talk to us. If you would like to check your home insurance policy or review it in line with index linking, contact us.
Email: info@lloydwhyte.com
Lloyd & Whyte Ltd are authorised and regulated by the Financial Conduct Authority. Registered in England No. 03686765. Registered Office: Affinity House, Bindon Road, Taunton, Somerset, TA2 6AA. Calls may be recorded for use in quality management, training and customer support.
