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 may no longer exist. 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? Whitbread are making it our mission to ensure our clients are informed and protected against underinsurance.
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, and they are underinsured, their insurance cover will not be sufficient to rebuild and replace the contents in their home.
Despite the fact that most insurers 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 more than 80% (i) of Australians are underinsured for their home and contents!
*indexation is a 4-6% annual increase on your sums insured to reflect inflation and the subsequent changes to reconstruction and building costs.
What are the consequences of being underinsured?
When purchasing or renewing insurance, it is important to make an informed choice and ensure 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
e.g. 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.
3 factors that contribute to underinsurance
- Mismanaging sums insured
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. This isn’t the best tactic and can end up costing far more in the long run.
- 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 significantly above anything you anticipated. Sadly this reality leaves many property owners being unintentionally 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
Whitbread’s tips for avoiding underinsurance
- Consult the relevant Product Disclosure Statement (PDS)
When obtaining a variety of insurance quotes, always obtain and read the PDS. It is crucial to fully understand the cover along with any conditions or exclusions that apply BEFORE purchasing your policy.
A PDS is always issued upon request from the insurer when getting a quote, or, upon receipt of your insurance policy documents. Don’t wait for a claim to be declined before you find out you’re not insured for what you thought you were!
Trawling through a PDS can be can be very confusing. Insurance Brokers are experts in this area, and can do this on your behalf. An insurance broker will navigate the various policies along with their inclusions and exclusions in order to ensure you get value for money as well as a quality insurance product that adequately protects your home.
- 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.
a) So, how should I calculate my Building Sum 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.
Did you know that the cost of building a new house has increased four-fold in the last 20 years (ii)?
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.
b) How should I calculate my Contents Sum Insured?
Determining an accurate sum insured for contents is difficult and can quite easily lead to underinsurance.
i) 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.
You’d be surprised at how much your less expensive items can amount to when added together (e.g. clothing, cutlery sets, books, artwork, glassware, etc).
ii) 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 insurance 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.
- Always review your policy at renewal
The trick to avoiding underinsurance is vigilance! Make sure you review your policy and update your home and contents sums insured every year.
We always endeavor to recommend policies that align with your specific circumstances to protect your assets when things don’t go to plan.
If you are concerned about your current level of insurance cover, and would like us to assist in finding something that better suits your needs please contact us.
This insight article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 Licence Number: 229092 trading as Whitbread Insurance Brokers for further information or refer to our website.
*Typical building replacement costs are provided by Reed Business Information Pty Ltd (A.B.N. 80 132 719 861) trading as Cordell Information (‘Cordell’) and typical building contents replacement costs are provided by Sum Insured Pty Ltd (A.B.N. 55 947 630 521 (‘SI’) trading as Home Contents. Whilst every care is taken to ensure the accuracy of the information as a guide for costing, no responsibility is accepted by Cordell, SI, Steadfast or the Steadfast Broker for its accuracy. Please check with an Architect, Builder, Quantity Surveyor, Valuer or other suitably qualified professional for an accurate estimate. Neither Steadfast nor the Steadfast Broker takes any responsibility for the costs provided by Cordell or SI, or any liability for the accuracy of or reliance upon or use of, the costs. To the fullest extent permitted by law, Cordell, SI, Steadfast and the Steadfast Broker expressly disclaim all warranties, express or implied, including, but not limited to, the implied warranty of fitness for a particular purpose. Cordell, SI, Steadfast and the Steadfast Broker do not warrant or make any representations regarding the use or the results of the use of the information provided in terms of its correctness, accuracy, reliability, or otherwise.