Being one of your biggest financial investments, it makes perfect sense to protect your home from unforeseen events such as natural calamities and man-made disasters – and most Australians do.
According to the Insurance Council of Australia (ICA), between 90% and 95% of all owner-occupied homes in the country have building insurance. The big question, however, is whether homeowners are getting enough coverage.
A recent survey conducted by the council revealed that more than 80% of respondents were concerned that their homes and personal belongings might be underinsured. The figure includes homeowners and renters.
If proven right, underinsurance can cause them a major financial blow at a time when they are already experiencing tremendous emotional stress. The good news is being underinsured can be prevented with the right understanding and preparation.
What does home insurance cover?
Home insurance coverage comes in two main types: sum-insured cover – where compensation is based on an estimated cost of rebuilding your home if it was entirely destroyed – and total replacement cover – which provides coverage for the overall cost of repairing or rebuilding your home to the same standard.
Most home insurance policies offer financial protection if the property’s physical structure and its contents are damaged or destroyed because of the following:
- Fire and explosion
- Storm and rainwater
- Lightning strikes
- Earthquakes and tsunamis
- Falling objects such as trees
- Theft and vandalism
- Bursting pipes
Coverage for floods, accidental damage, and electric motor burnout are often offered as add-ons and can raise premium prices. You can also get legal liability coverage for financial protection against claims of bodily injury or property damage within your home’s premises.
How much does home insurance cost?
There are several factors that impact the cost of your home insurance, including the type of coverage you want (building, contents, or both) and if you decide to get additional coverage (flood and accidental damage). The location of your home and its features, along with your claims history, can also affect the cost of your policy.
Because these parameters can vary significantly for each policyholder, it is difficult to provide an accurate estimate of how much home insurance premiums cost. According to some financial comparison websites, building insurance can start at $800 and exceed $4,000 annually, while contents insurance can range from $300 to above $800 a year.
What happens when your home is underinsured?
Underinsurance happens when your insurance is not enough to cover the cost of loss or damage to your home and possessions. Most insurance providers say that a policyholder is likely underinsured if their coverage is 90% or less than the cost to rebuild their homes and replace damaged belongings.
If your insurance policy does not cover the full cost of rebuilding or replacing your property and possessions, you will need to pay for the difference from your own pocket. This can be a great financial and emotional burden for many, especially after the traumatic experience of losing a home.
To illustrate, let’s say your home carries an insurance policy with a cover limit of $400,000 and it was totally destroyed in a bushfire. After filing a claim, your insurer tells you that their assessment reveals that it will cost $750,000 to rebuild your home to the same standard and replace its contents. This means you will need to cover for the $350,000 at a time when you will also be worrying about finding a place to stay.
How can you avoid being underinsured?
While being underinsured can result in dire financial consequences, it is also preventable. Here are some ways you can avoid underinsurance.
1. Understand the true cost of rebuilding your property
The cost of rebuilding your home may differ significantly from its market value. To get an accurate estimate of how much you will need to spend to rebuild your property, it is advisable to enlist the services of a licensed builder or an accredited valuer. These trained professionals often consider a range of factors when assessing the cost, including architectural and legal fees, demolition and debris removal, and the choice of building materials and possession replacements.
2. Make an inventory of all your possessions
Having a list of all your belongings will make it easier for you to work out how much it will cost to replace them. You can download a comprehensive home inventory checklist from ICA’s website. Many insurance providers also have replacement cost calculators that policyholders can use.
3. Know what is covered by your policy
Your insurance contract consists of your certificate of insurance and the product disclosure agreement (PDS). Be sure to carefully read your PDS as it tells what your policy’s inclusions and exclusions are, its maximum claim limits, and other terms and conditions. The PDS may also include buzzwords and jargon that may be new to you, so it is advisable that you consult your insurance agent for any questions and clarifications.
4. Make sure to update your policy regularly
If you make any improvements and renovations in your property, or purchase valuable assets such as artwork and jewellery, make sure you update your home insurance policy as soon as possible, so these can be covered. Accidents and calamities hit unexpectedly and if you fail to inform your insurance provider about these changes, you may not be able to make a claim in the event of loss or damage.
5. Consider adding an underinsurance coverage
Some insurance companies offer underinsurance coverage, which will provide coverage for more than your maximum limit. This often applies when your home’s value rises after a cover limit has been set.