Your home is likely to be one of your biggest financial assets, and the belongings inside it can represent years of purchases, memories and accumulated value. Yet many homeowners may not know whether their home and contents insurance would actually be enough to rebuild, repair or replace everything after a major loss.
Having insurance is important, but having the right sum insured is just as critical. If your cover is too low, you could face a significant financial shortfall at exactly the time you need support most.
The Risk of Underinsurance
Underinsurance occurs when the amount your property is insured for is less than the actual cost of rebuilding your home or replacing your possessions.
For example, if rebuilding your home would cost $800,000 but your policy only provides $600,000 of building cover, you could potentially be left responsible for a substantial difference following a total loss, subject to the terms and conditions of your policy.
Even a partial claim can be affected under some insurance policies if the insured amount does not adequately reflect the value of the property or contents.
Construction costs, labour expenses, materials, inflation and changes to your home can all increase replacement costs over time. This means a sum insured that looked appropriate several years ago may no longer be sufficient today.
Here are some practical ways to help keep your cover up to date.
- Review Your Sum Insured Every Year
Your annual insurance renewal is a good reminder to check whether your building and contents cover still reflects your circumstances.
Rather than automatically accepting last year’s figures, consider what has changed. Building costs may have increased, you may have bought new furniture or electronics, or you may have completed renovations.
- Think About Rebuilding Cost — Not Property Value
The market value of your home and the amount it would cost to rebuild it are very different things.
Your building sum insured should generally consider the cost of rebuilding the structure, including materials and labour, rather than simply using the property’s sale price.
Rebuilding can also involve demolition, debris removal, professional fees and meeting updated building requirements, depending on the policy.
- Use a Building Cost Calculator
Many insurers provide online building replacement-cost calculators. These can provide a useful starting point by considering factors such as the size of your home, construction materials, location, number of storeys and quality of finishes.
For unusual, high-value or extensively renovated properties, obtaining a professional building valuation or quantity surveyor’s assessment may provide greater confidence.
- Walk Through Your Home Room by Room
When calculating contents insurance, mentally walk through every room and consider what it would cost to replace everything at today’s prices.
It is easy to underestimate the combined value of televisions, appliances, computers, furniture, clothing, kitchenware, sporting equipment, tools and personal belongings.
Even relatively ordinary household items can quickly add up to tens of thousands of dollars.
- Pay Attention to Valuable Items
Jewellery, artwork, watches, cameras, collectibles, bicycles and other high-value possessions may have specific limits under a standard contents policy.
Check whether valuable belongings need to be separately listed or specified and keep receipts, photographs, valuations or other evidence where appropriate.
- Update Your Insurance After Renovations
A new kitchen, bathroom, extension, shed, outdoor entertaining area or major landscaping project can significantly increase the cost of rebuilding your property.
Don’t wait until your next renewal if you have made substantial improvements. Contact your insurer or insurance adviser when important changes occur.
- Consider the Impact of Rising Costs
Building costs do not remain static. Inflation, shortages of building materials, natural disasters and increased demand for tradespeople can all affect reconstruction expenses.
Allowing some margin for future increases can be important, while some policies may also include automatic indexation or additional rebuilding allowances.
Protect What You Have Worked to Build
Insurance is designed to provide financial protection when unexpected events occur. However, that protection is only as effective as the level of cover behind it.
Regularly reviewing your home and contents sums insured can help reduce the risk of discovering, after a serious event, that your insurance is insufficient.
An insurance professional can help you understand your existing policy, identify potential gaps and consider whether your level of cover remains appropriate for your home, belongings and circumstances.
A little time spent reviewing your insurance today could make an enormous difference when you need it most.
If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.
This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.
(Feedsy Exclusive)
