It is a simple fact that most homeowners will not have enough savings to rebuild a badly damaged or destroyed home, or to pay off the mortgage still owing even though the home no longer exists. That’s why we have insurance, right?
Even though most homeowners do have Home Insurance, a worrying proportion of people do not insure for the amount required to rebuild and replace their home in a total loss. This makes them underinsured.
Underinsurance should be avoided at all costs, as it can substantially reduce your insurance payout in the event of a claim, and the flow on effect can be highly detrimental to your long term financial position.
Have you insured your Home and Contents for the right value? Are you at risk of being underinsured?
So What is Underinsurance?
Underinsurance is defined as:
“The habit of insuring a building and/or its contents for less than their replacement value.”
Essentially, if a homeowner loses everything in a fire, their insurance cover will not be sufficient to rebuild and replace the contents in their home.
Despite the fact that most insurers (and we at Statewide) annually index the sums insured of Home and Contents Insurance policies in line with Consumer Price Index increases, underinsurance is still rife in Australia.
You may be surprised to learn that some research suggest more than 80% of Australians are underinsured for their home and contents!
The Consequences of Being Underinsured
When purchasing or renewing insurance, it is important to make an informed choice and ensure that you have nominated the correct sums insured to sufficiently cover your home and contents.
Neglecting to do so will mean you are left with an insurance policy that is ineffective for two main reasons:
It won’t cover the cost to ‘fully reinstate’ your home and contents in a total loss
It will not offer protection against the potential financial impact to you and your family
eg. In a total loss – if your home is insured for $400,000 but the total cost to replace it is $650,000 you will be out of pocket $250,000 or, be required to continue paying a mortgage for an asset that is significantly diminished in value or non-existent.
You may (highly likely) only receive a claim payment proportionate to your underinsurance. eg. $400,000 / $650,000 = 61%. 61% of $400,000 = Claim payout of $246,000. WELL below the $650,000 required!
3 Key Factors That Cause Underinsurance
The ‘set-and-forget’ strategy employed by many property owners is often a contributing factor that inadvertently leads to underinsurance.
When purchasing a property, many individuals opt for a basic level of coverage, but neglect to reassess their needs at renewal. Property owners are often deterred from updating or increasing their sums insured to reflect an accurate value as amendments or additions can often attract an additional premium.
Furthermore, some property owners even knowingly lower their Sums Insured or nominate an incorrect insured value to reduce their home insurance premium. A very dangerous tactic that can end up costing far more long term.
Accumulation of possessions
Over time, the gradual acquisition of items like sporting equipment, jewellery, clothing, books, dinner sets, and small appliances can substantially increase the total value of contents in your home.
When you add up the replacement costs of your possessions on a room-by-room basis, the total value can often be way above anything you anticipated. Sadly this reality leaves many property owners unwittingly underinsured.
Upgrading your assets without updating your policy
Modernising your property in a renovation, or replacing older items with new ones can greatly increase the value of your property and its contents. Failing to account for this increase in your Home and Contents policy sum insured is another situation that can lead to underinsurance.
Simple examples to watch out for include:
– Replacing your old TV with a new LED TV
– Upgrading your lounge suite
– Minor or major renovations to your property
Be Vigilant when Calculating your Home and Contents Sums Insured
Calculating the replacement costs of your home building and contents can be a nightmare – online insurance calculators are a dime a dozen and they won’t necessarily result in recommending suitable or accurate Sums Insured.
To avoid the perils of calculating your own Building Sum Insured, we suggest seeking the services of a Sworn Independent Valuer.
While this may come at an additional cost, there is no substitute for professional advice. A valuer will take all mitigating factors into account e.g. new regulations, increased cost of building materials and labour, as well as bylaws in order to provide you with accurate sums insured to be specified on your insurance policy.
We recommend a new valuation every 3 to 5 years to ensure that your building sum insured remains sufficient to cover your assets in a total loss.
Determining an accurate sum insured for contents is difficult and can quite easily lead to underinsurance. Some tips which may assist include :
Perform a room-by-room audit to create a catalogue of all your possessions and their approximate value.
This will assist to ensure you are able to nominate an accurate Contents Sum Insured when taking out your insurance policy. We find it’s easy to remember the big ticket items, but most people overlook the smaller less expensive possessions.
Have you recently purchased or acquired additional valuables or assets?
When buying big ticket items and valuables it is essential that you update your Contents schedule and Sum Insured! Always tell your broker and / or insurer about additional valuables and irreplaceable possessions to ensure they will be covered in the event of a loss.
Keen to avoid underinsurance? The trick is vigilance! Be mindful to review and update your Home and Contents Sums Insured every year, dont try and skimp by taking sums insured lower than they should be, and of course, always talk to your broker to learn more on how to avoid a potential underinsurance nightmare!