What is home insurance total replacement cover and how can it benefit you?
When buying home insurance, it’s essential to be sure that you purchase enough cover to rebuild your home if it’s completely destroyed. Unfortunately, most of us don’t have the knowledge or expertise required to accurately work out how much our home would cost to rebuild. This is why total replacement cover is a good idea.
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What is total replacement cover?
Total replacement cover is home insurance that covers the cost of rebuilding your home to the state it was in prior to an insured event. If your home is damaged by an insured event, the insurer will either rebuild it to its previous state or pay you the assessed cost to rebuild it to its former condition.
These types of policies reduce the gap between the amount your home is insured for and what it actually costs to repair or rebuild the home to its original condition.
Only a few home insurers offer total replacement cover. As it provides a higher level of protection than ordinary home insurance policies, it also tends to have higher premiums.
Total replacement cover vs sum insured cover
There are two main types of home insurance available: total replacement cover and sum insured cover. Sum insured cover allows you to nominate the maximum amount of cover you want to buy for your home. For example, if you think your home will cost $500,000 to rebuild from scratch, you would insure it for $500,000. If your home is completely destroyed by an insured event, the insurer will then pay a benefit up to that set limit.
How does it differ from total replacement cover? Well, while total replacement insurance covers the market value of rebuilding your home, sum insured cover makes it your responsibility to decide how much your home will cost to rebuild. Check out the table below for details of the differences between these two types of home insurance:
|Total replacement cover||Sum insured cover|
|You don’t set a cover limit.||You set a cover limit.|
|The insurer pays the total cost of rebuilding your home.||The insurer pays up to that limit if your home is damaged by an insured event.|
|Worth considering if you don’t know how much it will cost to rebuild your home.||Worth considering if you know how much it will cost to rebuild your home.|
|Best protection against underinsurance.||Higher risk of underinsurance.|
How to calculate the replacement cost of your home
Your home is the most expensive thing you’ll ever own, so working out an appropriate level of home insurance cover is critical. Unfortunately, this can be a tricky task for the average homeowner – the value of a home (ie, how much you paid when you bought it) and the cost to rebuild it to its previous condition are two very different things, and many people simply don’t have enough knowledge to be able to say with any certainty how much cover they need.
Yet when you buy sum insured home insurance, you’ll need to specify the magic number you want to cover your home for – and this can cause big problems. According to the Insurance Council of Australia, 83% of Australian homeowners and renters are underinsured.
So, how can you work out how much cover your home needs? There are two main methods:
- Cost per square metre. This is a basic method and is based on the size of the house and the materials used, so it can’t be relied upon to provide an accurate figure.
- Elemental estimating. This is a much more sophisticated method that takes into account a range of factors, including local wage rates, material costs, the quality of finish used, the nature of the building site, how many levels the home has, council approval fees and more.
Using online calculators
To help you work out how much cover is enough for your home, many insurers offer handy online calculators. However, rather than taking the figures quoted by these calculators at face value, try to look for a calculator that takes into account current building and replacement costs to help you reach a more accurate sum insured.
This calculator from the Insurance Council of Australia is a great place to start.
Is total replacement cover right for me?
The biggest benefit of total replacement cover is that it greatly reduces the risk of underinsurance. Rather than having to rely on your own (perhaps limited) knowledge to decide on a suitable amount of cover for your home, these policies provide the peace of mind that comes with knowing you will be able to afford the repair or rebuilding costs when disaster strikes.
However, there are a couple of key disadvantages you should be aware of before purchasing cover:
- Higher cost. Total replacement cover is usually more expensive than sum insured cover.
- Delayed payment. You might have to wait a little longer to receive the funds from a total replacement policy as the insurer will need to complete a thorough assessment to work out the total cost of rebuilding your home.
It’s also important to remember that sum insured policies shouldn’t be dismissed outright just because of the risk of underinsurance. If you’re willing to spend a little time calculating the approximate rebuilding cost for your home, you’ll stand a much better chance of choosing an appropriate level of cover. Many policies also feature a “safety net” that can provide up to 30% additional cover on top of your sum insured if your home is declared a total loss.
Regardless of whether you choose total replacement or sum insured home insurance, it’s essential that you shop around. By comparing the features and cost of a range of policies, you’ll find the best value for money.