I am buying a new home but don't know how much building and contents insurance I need - how do I work it out?

JARGON BUSTERS: WHAT KEY INSURANCE TERMS MEAN

Ancillaries

These are optional extras you can add to your insurance for an additional premium such as legal or home emergency cover.

Excess

The first portion of a loss or claim that the insured person must pay. Sometimes the policyholder can choose the excess they pay when taking out a policy. Generally the more they are willing to pay, the lower the premium.

Exclusions

There are times when an insurer could refuse to pay up. Check the small print. Often policies will exclude ‘acts of God’ or war, but will include natural disasters such as flood.

Premium

The cost of your insurance. You will be able to pay this monthly or upfront. Check if there is an extra charge for paying on a monthly basis.

Sum insured

What the insurer is willing to pay out when a claim is made.

Underwriter

An underwriter looks at the applicant and works out the risk. This informs the premium they should pay and how much cover they could get.

Buildings insurance covers the actual structure of your home - the walls, floors, roof and so on.

A good buildings insurance policy should cover you for fire, flood, subsidence, storms, lightning, theft or vandalism, escape of water and oil, and damage caused by falling trees, branches or other objects.

It should also cover damage to fixtures and fittings too.

If you can no longer live in your house for a period of time because of damage, your insurance will also cover alternative accommodation costs.

Insurers tend to work out buildings cover based on the rebuild value or the number of bedrooms.

The rebuild cost

You will need to decide on a level of building insurance cover, known as sum insured.

This is not based on the market value of your property but is a calculation related to the cost of rebuilding your home.

The rebuild cost can be lower or higher than the market value.

You could pay for a surveyor to work out the cost or the Association of British Insurers has a free calculator to help you work out the rebuild cost of your property.

But first you need to find the gross external floor area of your house.

This is calculated by working out the floor area on each level.

So if you live in a two-storey house with each floor area measuring 12 x 5m, you would need to add each level together, giving 60 square metres each and a total GEFA of 120 square metres.

The calculator will also ask for the location, number of rooms, when the property was built, the roof and wall type and any car park spaces or garages.

For example, the rebuild cost of a two-storey three bedroom semi-detached property arranged over 120 square metres in Hertfordshire with two bathrooms would be £179,000, according to the calculator.

Bedroom-rated cover

The insurer can estimate the cost of rebuilding your home based on the number of bedrooms. It will come up with its own sum insured figure based on its own calculations.

This is less exact than working out the rebuild cost and could result in you paying higher premiums for too much cover. But it is less complicated to work out.

If you are renting then you will only need contents insurance as the landlord should insure the building.

Contents insurance

Contents insurance provides protection to loss or damage of items in the home.

This typically includes furniture, household goods, food and drink, TVs, computers, clothing and valuables, usually up to a stated limit

The policy pays out if any of your home contents are lost or damaged. Claims are usually made after a burglary or a fire, but a policy should also pay if your possessions are damaged or lost as a result of an explosion, leaks or if your home is vandalised.

Similar to buildings insurance, your provider will give a sum insured, which is the maximum it will payout up to.

Check the small print to see if your insurer will provide extras such as legal expenses or emergency repairs.

An extra such as legal expenses cover can be crucial at times such as neighbour disputes. For example if there was disagreement over the right to build over land on your home’s border you could use the cover to pay for the costs of solicitors or legal action

There is usually a limit on how much you can claim under the policy but most insurers provide up to £100,000. There will also be a time limit that you have to claim within after an incident.

Working out your contents cover

You need to work out what the contents in your home are worth. It is worth going round the house and working out the cost of replacing items at today’s prices, rather than what you purchased them for.

Make sure you don’t underinsure. Putting a lower value on your possessions may push down your premium, but if you were to get burgled you may find that your insurance won’t fully cover the value of your replacement goods.

Some insurers have handy calculators that takes you on a tour of your home, allowing you to tot up the value of your contents as you go. Bear in mind that some prices, such as the cost of clothing, will need to take account of wear and tear.

Some insurers may have a ‘single article’ limit, which is the maximum they will pay out for individual products such as an engagement ring. If an item is worth more than the limit you may need to pay a bit extra and get them listed on your policy.

Also check if you are covered for personal belongings taken outside the home.

Your cover is likely to be cheaper if you take steps to reduce theft and damage such as burglar alarms, storing items in a safe and installing smoke detectors.

Must have features

The Money Advice Service has listed the minimum provision you should expect from a contents insurance policy and the excess.

How do I insure my home?

You will pay the insurer a monthly fee, known as a premium, or you may be able to pay the full cost upfront, which can work out cheaper. There may also be an excess you pay for any claims. Usually the bigger the excess, the smaller the premium.

Prices and levels of cover will differ among providers so it is important to shop around.

Comparison websites have made it easier to shop around for insurance deals, but it is also worth looking at specific providers as some may offer the best deals direct. You could also consult an insurance broker but you may have to pay a fee for using their services.

Many companies now offer policies incorporating both buildings and contents. This won’t necessarily be cheaper and remember there are always exclusions so check the small print.

Insurers will also have conditions such as the types of locks and security you have at the property.

Choosing the right type and level of cover for both is crucial to make sure you are adequately protected should disaster strike.

For example, according to Axa the average claim for a burst pipe is £25,000. That is a lot to pay out yourself if you don’t have the right type of cover.

KEEP YOUR POLICIES UP TO DATE

If your make any changes to your property such as building an extension, you should inform your insurer as your level of cover may need to be increased.

Also keep an eye out for structural damage that could suggest subsidence as this could increase the level of risk and push your premium or excess up.

You should also add any expensive contents to your policy when you buy them if it is likely to push up the level of cover needed.