The underinsurance dilemma: How to make sure you are protected
Taking out home insurance is almost always done with the best of intentions, after all, we all want to protect the things we care about. But often when it comes to home and contents insurance, it can be a case of ‘set and forget’. That is, we take out insurance and keep paying the premiums hoping we never have to use it. And we put it out of our mind.
Unfortunately, according to a survey conducted for the Insurance Council of Australia, more than 80% of Australians could be ‘underinsured’*. Even if you aren’t too concerned about your own situation, it might pay to read on.
8 minute read
What you'll learn
- The definition of underinsurance
- Some of the risks of being underinsured
- Common causes of underinsurance
- Four steps to help avoid underinsurance
- Some considerations when estimating building and contents sum insured
Firstly, what is underinsurance?
To be ‘underinsured’ is exactly what it sounds like. When it comes to home insurance, it means you have home insurance coverage in place, but the amount you are covered for (the ‘sum insured’) is not enough to pay for the full cost of rebuilding your home or replacing its contents at their current value should disaster strike, or the unexpected happen.
The risks of being underinsured in Australia
If your home insurance policy does not cover you for the full value of your home and contents, it means you may not have enough insurance cover to fully repair, rebuild or replace your home and all its contents. That means you will need to pay any shortfall if you decide to make a claim.
Here’s a quick example to illustrate. Say you have a home and contents insurance policy with a cover limit of $350,000 and your home is destroyed in a bushfire. After filing your claim, you learn that the insurer has assessed the total cost to rebuild your home and replace its contents at $620,000. That means you would need to make up the $270,000 difference out of your own pocket.
The good news is it is something that can be avoided.
Common causes for underinsurance
In some cases, people choose a lower insured value to bring down the cost of their home insurance premium. However, underinsurance is usually not a conscious choice, it’s simply a result of not making the decision to regularly update the amount you’re covered for.
Of course, there are other causes for underinsurance.
Inaccurate estimations. Having a guess at the rebuild, repair or replacement costs of property and contents can lead to inaccurate estimations. Even if your home sum insured is up to date, other factors may come into play and costs can spike unexpectedly so it pays to be prepared. There are plenty of home and contents insurance calculators online to help you get a clearer picture of the current value of your building and its contents.^
Upgrades and renovations. Making changes to your home will likely impact its value, so if you have done any renovations or upgrades since your home was last valued, it may cost more to repair or rebuild it to the newer standard if you need to make a claim on your building insurance.
Changes in the cost of goods. New furniture, electronics, even clothes and shoes are more expensive now to replace than they were a few years ago. Compiling a home inventory list is a great thing to do up front because it prompts you to think hard about everything you own. When paired with a Contents Insurance calculator^, you can double check your contents sum insured using up-to-date cost data.
Increased building costs. The rising cost of labour and building materials will have a flow-on impact on the rebuild costs or repair costs of your property. A builder or a professional valuer can help you work out the rebuilding costs of your house to help you determine your ideal building sum insured.
Supplementary costs. This includes costs that may or may not be covered by your insurance policy. It’s worth checking your policy to see if you’re covered for things like clean-up, demolition, asbestos removal, additional building expenses like council and architect fees, or even the cost of temporary accommodation while you rebuild.
On the flip side, you don’t want to ‘overinsure’ your property. For one, the insurer will usually only pay the replacement value or rebuild costs. Plus, the resale value of your property includes the cost of the land, so you don’t need to include that part, just the cost of replacing the buildings (and contents).
Home insurance may be required as a condition of your home loan. However, it’s up to you to decide on the sum insured, and the type and level of cover that you want to take out.
Your four-step plan to help avoid underinsurance
Step 1: Start by digging out your current insurance policy.
It’s a great time to check the full details of your policy including your sum insured. It's also useful to get familiar with the product disclosure statement and make your own enquiries to see exactly what your policy covers (and how much you’re covered for) so you can understand any exclusions or limitations.
Step 2: Get a current estimate for the cost of rebuilding your home.
We touched on online calculators above. They are one way of getting an estimate for the replacement cost of your home and contents. But you could also enlist the services of a builder or professional valuer to help you work out the cost of rebuilding your house, hence 'the sum insured'.
Start with this Home insurance calculator^ to help you work out an up-to-date cost of rebuilding.
Step 3: Compile a detailed inventory of your contents
Put together a detailed inventory of all your personal belongings. Remember to include anything in your garage and garden shed, or things stashed away in cupboards, and think about the full cost to replace it to the same standard in the event of a claim. It’s a good idea to ask your insurer what cover options are available for contents away from home too.
Use this Contents Insurance calculator^ to help you work out a realistic amount or ‘sum insured’ for your contents.
Step 4: Check your cover regularly
Make it a habit to review the sum you have insured on your policies each time you renew your home and contents insurance. This is a great strategy to help you ensure you have the right level of cover for your circumstance and avoid underinsurance (or overinsurance for that matter). You should definitely review your sum insured when you make any significant purchases or undertake a renovation too.
When you make your inventory list, you could think about whether there’s anything on it you could do without if it were stolen or destroyed. This may be one way to potentially reduce your premium cost – but you’d need to be sure!
More on estimating rebuilding costs
A home building replacement cost calculator^ is an effective tool designed to help you answer the question 'how much should I insure my house for?' and avoid underinsurance. The calculator poses a range of standard questions, and considers different aspects of your building’s construction, features and other associated costs.
Standard considerations: The calculator uses basic information to help work out your home's replacement value like the location of your property, when it was built, how big it is (floor area in square metres and number of floors), the quality of construction and the types of materials used.
Your home’s features: It looks at other features of the house like bathrooms, kitchens, windows and doors, balconies, garages, security, heating and cooling, lighting and water systems or solar power in terms of number and size to provide more specific data to help estimate the replacement cost.
Indirect expenses: Other things that are not directly involved with the rebuild of your home should be considered, including any demolition work and debris removal from the property, architect fees, surveying costs, council application fees etc. Not to forget the expenses associated with living elsewhere while your property is rebuilt. Check your policy, it may even include automatic cover for these things on top of your ‘sum insured’.
Remember, calculators only provide estimates based on averages. The specific circumstances of any situation may be different, so when determining the current replacement value of your buildings, it’s a good idea to consult an architect, a builder or a valuation expert.
Don’t forget to revisit this after a major renovation because you may need to adjust your level of insurance.
Estimating the replacement value of your contents
Contents insurance can cover the cost to repair or replace your possessions.
When it comes to the contents sum insured, a home contents replacement calculator^ can be used to help you determine how much it would cost to repair or replace your personal belongings. The initial estimate is based on the quantity and quality of your contents and the number of rooms, balconies, garages and sheds.
The calculator used above was developed by Sum Insured, a company that specialises in the research and production of building contents information. However, it only provides an estimate based on averages. To get an accurate estimate of the replacement costs of specific contents, you will need to consult a valuation expert or compile a detailed inventory of all your contents.
Take clear pictures and hang on to receipts to help in the calculation of the true replacement value of your contents.
Why is this important now?
Extreme weather events (including an insured event like a bushfire or flood) are becoming more frequent and more severe in Australia# so it's more important than ever to ensure you have enough cover for your circumstances should a natural disaster happen.
Spend a few minutes using the calculators to check how comfortable you are with your current level of cover, and you can make sure you are protected in the event your building and contents are badly damaged or destroyed.
If you need to make any adjustments, you should do it sooner rather than later as some insurance policies may have exclusion (or waiting) periods when it comes to natural disasters.
Four reasons to consider arranging your insurance cover through Westpac
- Westpac Home and Contents Insurance is provided by leading insurer Allianz Australia Insurance Limited.
- Automatic flood cover. Westpac Home and Contents Insurance, provided by Allianz comes with flood cover as a standard inclusion.
- Specified contents cover. You have the option to choose ‘specified contents’ in your policy where you clearly state the likely value of possessions you consider valuable to you, such as jewellery.
- Portable contents cover option. For an additional fee you can also protect items like mobile phones, cameras and engagement rings when you’re away from home under the ‘portable contents cover’ option.
Need help?
Call the specialist Westpac Insurance team at Allianz to check or change your policy by calling 1300 650 255. Or if you know what you need, you can get a quote online.
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Things you should know
^The Building and Contents calculators provided by Allianz through a third party provider, are intended as a guide only. For a more accurate cost to rebuild your home or replace your contents, consider obtaining a professional valuation from a licensed builder or professional valuer.
This information does not take into account your personal circumstances. Before making a decision, please consider the relevant Product Disclosure Statement. To see some of the events covered and not covered, please refer to the Key Fact Sheets (KFS). For more information call 1300 650 255.
Home and Contents Insurance is issued by Allianz Australia Insurance Limited ABN 15 000 122 850 AFSL 234708 (Allianz). Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 (the Bank) arranges the initial issue of the insurance under a distribution agreement with Allianz, but does not guarantee the insurance.
If you take out Home and Contents with Allianz the Bank will receive a commission of up to 12% of the premium, excluding Government fees and charges, plus GST.
A target market determination has been made for this product. Please visit www.westpac.com.au/tmd for the target market determination.
By selecting 'Get a quote' you will enter a third-party site hosted by Allianz. Any personal information you provide to Allianz’s hosted site will be collected, used and disclosed in accordance with Allianz’s Privacy Statement and Privacy Policy.
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