No-one likes to think anything will go wrong in their lives ‘ especially with their finances ‘ and that is why most borrowers see buildings and contents insurance as a no-brainer. The thinking behind this is that it is better to be on the safe side than risk huge bills, but very few have the right cover.
But with such a ready market out there it makes sense for mortgage brokers to take this part of the advice process as seriously as the mortgage. If the worst happens and the borrower finds they cannot claim, it will be something they will remember when they come to remortgage ‘ and they will go elsewhere.
People often complain insurance is a waste of money and that when it comes to making a claim, whatever you want to claim for is bound not to be covered. This opinion comes from people not understanding at the outset what their insurance covers.
Opening new doors
Mortgage advisers are in a great position to help change this situation by taking longer to look at clients’ insurance needs and explain the options available to them.
By doing this it should become apparent to the client the cheapest cover is not necessarily the best. Many media articles inform borrowers of the financial savings they could make by switching, or taking out their building and contents insurance with cheaper providers.
However, what these articles often fail to tell readers to consider is the differences in the levels of cover which are offered in the market. While price is obviously important, so is what is and is not covered by the policy. This area can end up having a huge impact on people’s finances, should things go wrong.
Unsurprisingly therefore, figures show a quarter of homeowners do not have appropriate insurance if the contents of their home were damaged or stolen. More than a third of households do not have any building insurance. When the cost involved in rebuilding a home is considered it seems amazing more than three in 10 people are willing to take such a risk.
Much of this consumer apathy could be due to a lack of understanding of what building and contents insurance covers and costs. The figures above highlight the potential for mortgage advisers to help customers fully understand the implications of having inadequate insurance on their home and help them to find the policy which suits their needs.
Spot the difference
Building and contents insurance policies are not all the same. Some of the most common differences include the amount of cover available on different contents policies, such as cash and credit cards, business equipment, frozen food, temporary removal and whether contents are covered on the new for old basis.
Another important differential is whether cover extends to items kept in garages and sheds, or contents left in the open such as garden furniture and ornaments. A valuable aspect of building cover, which is easily overlooked, is alternative accommodation. It is only required when disaster strikes, but if the borrower’s home is damaged by fire, flood or subsidence, the chances are they will need to move out. Most insurers provide either a percentage of the sum insured for alternative accommodation, or a fixed sum such as £25,000.
By spending more time explaining to clients the different costs of building and contents insurance together with the differing areas covered by each policy means they can make an educated decision about which policy offers the level of protection and best price for them.
And by finding out the level of insurance needed by a borrower, mortgage advisers can gain a greater understanding of what is important to them and may be able to help them to reassess their needs in other financial areas.
Enhancing your service
With an array of offerings available to borrowers, providing the most appropriate building and contents insurance is another area where mortgage advisers can provide an enhanced service to their clients.
Certainly a client who has saved thousands of pounds because the cover they chose to take out protected them when their home was flooded, is likely to appreciate the help they received and return to the original broker when they are planning their finances in the future.
So what do advisers need to know? Insurers generally need to know the postcode of the property to be insured, the type of property, the number of bedrooms and the year the property was built. Also of importance will be whether the property is of standard construction or not.
There are a number of different types of building and contents insurance policies available for borrowers. The majority of policies are on a reinstatement cover (new for old) basis. This means that provided the customer insures for the full, (replacement as new) value, then no deduction is made for age, wear and tear, except for clothing and bed linen over two-years-old in the event of loss. The contents sum insured has to represent the ‘full value’ at risk. In other words, what it would cost to replace every item on a ‘new-for-old’ basis, including all those forgotten family heirlooms in the loft.
Another common type of cover is indemnity cover, which is a contract where the value at risk reflects a reduction for age, wear and tear. Availability is restricted, and customers need to fully understand what they are getting into if they go this route. Most policies taken out on this basis have been in force, unchanged, for many years with the same insurer.
Accidental damage policies provide additional reassurance should the worst happen, for example a careless foot through the ceiling when lining the loft, or tripping over the dog when carrying a tray of drinks and staining the carpet.
Standard contracts cover a comprehensive range of risks, and basic contracts cover a sum insured based for both buildings and contents. The borrower needs to be confident of the rebuild sum insured on their home before taking this route.
A rebuild valuation from a recent qualified surveyors report would provide some comfort that the sum insured was adequate to rebuild the property if it were totally destroyed, including a sum for debris removal and architect’s and surveyor’s fees
Finally there is bedroom-based insurance. This can potentially make the whole process simpler for both the adviser and the client. Provided the customer supplies basic information, then the premium for both buildings and contents can be calculated simply and quickly.
Peace of mind
Additional peace of mind is provided in that the building and contents sums insured are ‘limit’ based, for example £250,000 and £40,000 for buildings and contents, respectively. Provided the property meets the insurer’s acceptance criteria, then care only needs to be exercised if the property and contents sums insured are close to, or beyond, the limits provided by the insurer.
Many insurers also provide other options which can be taken out, such as all risks cover. This insures against loss or damage to personal possessions and valuables when away from the home. Typically, items worth up to £1,000 each are covered. If the item is worth more it can be specified on the policy, but proof of value will be required in the form of a recent purchase receipt or valuation.
It should always be explained to clients that a household insurance policy, no matter how comprehensive, is not a maintenance contract. Just as no one would expect a car insurer to replace their tyres when they wear out, borrowers cannot expect an insurance company to replace a roof when it comes to the end of its life.
When the benefits to the client of understanding the options available and making an informed decision about protect-ing their home are considered, together with the opportunity for brokers to increase the chance of building a long-term relationship, it must surely make sense to spend extra time discussing building and contents insurance.
Andy Homer is press office manager at Alliance & Leicester
Thousands of borrowers have inappropriate buildings and contents insurance in place.
Insurance policies cover different things, for example, not all include cover for gardens and outbuildings.
On standard properties, limiting the sums insured with bedroom based insurance can be simple and fast to arrange.