An estimated eight in 10 Australian homeowners are underinsured, according to insurance websites that cite the Insurance Council of Australia (ICA) or the Australian Securities and Investments Commission (ASIC).
If you consider the rise in extreme weather events, inflation, mortgage interest rates, and average insurance premiums since then, it makes sense to expect underinsurance rates to be higher.
Plus, the Actuaries Institute of Australia has found that one in eight Australian households are tackling severe home insurance affordability stress. That means more than four weeks of their gross household income goes to paying their premiums.
But an insurance premium isn’t ‘take it or leave it territory’. It’s wise to regularly review your level of insurance cover to suit your needs, budget, and wriggle room for compromise. As well, reviews mean you’re less likely to suffer financial loss if a disaster strikes your home.
Is your home at risk of underinsurance?
Underinsurance occurs if there’s a shortfall between your insurance and the total cost to repair or replace your damaged or destroyed home and its contents.
If there’s a disaster, not having enough cover or the right level of insurance could delay your insurance claim and possibly result in a gap that prevents you from rebuilding your home. Or you’ll have to significantly compromise on the quality or extent of the rebuild.
Common causes of underinsurance
The level of cover you took out when you last refreshed your policy may no longer be a good fit if you have:
- Completed renovations
- Got married, have had children or changed your lifestyle
- Inherited valuable family heirlooms
- Sold or acquired valuables that aren’t reflected in your original list
- Seen rebuilding costs change due to shortages of and delays in sourcing materials, or more onerous regulations (to deal with bushfires, floods, etc), and a rise in construction sector job vacancies
- Had your insurance policy terms, conditions, limits, inclusions, exclusions, and excess change.
Or you may have chosen to undervalue your home to reduce the cost of your premium.
How much home cover do you need?
Take the guesswork out of replacing your home or contents if they’re damaged or destroyed. Online calculators are a guide, so see what the ICA’s recommended ones say.
Avoid the more general websites that use a ‘cost per square metre’. For more thought prompts, visit the official MoneySmart website for right-sizing your building and contents cover.
Use this checklist for working out the current replacement value of your home and contents:
- Age/style of your home
- Quality of fixtures, fittings and furnishings such as curtains, carpets, and blinds
- Permanent features such as a garage, shed, swimming pool, solar panels
- Above ground spas or pools
- Renovations/extensions – update us at the start and completion of work because it could affect your cover
- Property slope and if you have a retaining wall
- Household electrical items, tools, musical instruments, artworks, home office equipment, personal items
- Portable items such as electronic devices you’d like insured.
How to avoid underinsurance
It’s not so much about how much you’ll want to cover your home for, but what it’s worth. Factor in appreciation and depreciation. That’s where an expert, such as a building contractor, professional valuer, or quantity surveyor, can help.
Some insurers may offer a safety net, adding up to 30% of your sum-insured amount, if there’s a total loss. They factor that into your premium and this underinsurance protection works well as cushioning. Check with us to see if that applies.
We can help you review your policy and your risk management approach.