More than 80% of Aussies don't have enough home insurance. Don't be one of them.
Aussies are putting themselves in a dangerous financial situation with more than 80% of homeowners not having enough home insurance, according to the Insurance Council of Australia.
But how do you work out how much is enough?
The key lies in accurately estimating how much it would cost to rebuild your home and replace your belongings, and keeping these estimates up to date.
How much should I insure my house for?
To figure out how much building insurance you need, don't ask yourself "How much is my home worth?" Instead, ask yourself "How much would it cost to rebuild my home?" No one expects you to be an expert in property assessment or the economics of construction, but you do have to put some thought into your valuation.
Luckily, there are plenty of online calculators to help you with this, and the best use a method called "elemental estimating". These calculators get into the minutiae such as whether your building sits on a slope and down to the materials used to make your countertops. It takes all this information and matches it against a database of local wage and material costs to come up with a far better estimate than you could come up with yourself.
Of course, it's still just an estimate, so if something doesn't look right, you can always consult an assessor or a builder to help you adjust your figures appropriately.
Since the name of the game is to avoid underinsurance, you'll want to stick with your final figures rather than lowball your estimate just to save a few bucks on your premiums.
How much contents insurance do I need?
You'll want to treat your contents insurance estimate similarly to the way you treat your building insurance estimate. Think about how much it would cost to replace each item, not how much it's currently worth.
Chances are you'll want to replace that 6-year-old, 55-inch TV with a new one, rather than go rummaging through Gumtree to try and find a direct replacement. So base your estimate on the brand new model rather than the old one.
You'll also want to account for all the new stuff you bring in over time. If you upgrade your home office with a treadmill desk, a space-age ergonomic chair and a new lightning-fast laptop, you need to update your policy to include the value of these items.
When you arrive at your final estimate, make sure you stick to it. The key here is to not let yourself be underinsured.
Getting covered for the full value of your home: Total replacement vs sum insured
Most policies operate on a sum insured basis, meaning the amount that you insure your building for is the amount you'll get if it's totally destroyed. This will leave you exposed to underinsurance if you don't estimate your home's value correctly.
As a remedy, some insurers have started offering total replacement cover to help you avoid underinsurance. With this cover, you don't state a specific sum to be insured. Instead, the insurer straight up agrees to pay you whatever it would cost to rebuild your home to its original condition.
This is great if you don't trust your own estimates or if you know you'll forget to update them yearly. However, you can be sure that the insurer's own estimates will work in the insurer's favour and they'll charge you accordingly for the premiums.
Why you should avoid underinsurance
The news is full of stories about Australians who lose their homes and everything they own in natural disasters or freak accidents. You may even know someone who's been through it. If this happened to you, could you afford to replace everything out of your own pocket? Would you be able to afford even a quarter of it?
Being underinsured means if you lose everything, your insurance won't pay for the full cost of replacing it. Low-balling the value of your home and contents to score a better rate on your premiums is one way to become underinsured, but it's not the only way. Here's how to prevent it from happening:
- Don't guesstimate. It's a bad idea to just guess at the value of your home based on limited information like its current market value. You have to consider the cost of removing the rubble after a disaster, paying labourers to rebuild, the fluctuating costs of raw materials and lots of other factors.
- Don't forget to update your cover. If your house goes up in value or you refurbish the entire place, the estimates you put together five years ago aren't going to cut it. You need to review your policy yearly to make sure it reflects the true value of your stuff.
What happens if I don't estimate properly?
You don't need total replacement cover to protect yourself from bad estimates if your policy offers a feature called a safety net. You'll still provide your own estimate, but you get a buffer of up to 30% of this amount to make up for any unexpected expenses over and above your sum insured.
Policies that offer this feature usually charge more for it and advertise it as a way to account for unexpected surges in the cost of building materials. This makes it perfect if you live somewhere where natural disasters can cause widespread damage, sending everyone in the neighbourhood scrambling to buy up the same raw materials at the same time.
You can also use it as a buffer to make up for a low estimate, but keep in mind you'll be paying for the privilege. Again, you're better off estimating correctly in the first place and adding your own buffer to the sum insured just to be safe.
Tips on how to estimate properly
It should be obvious by now that the best way to avoid underinsurance is to properly estimate the value of your home and contents and to keep these figures updated. Here's a summary of the ways you can do that:
- Ask yourself "How much would it cost to rebuild my home?", not "How much is my home worth?"
- Use an online calculator that uses the elemental estimating method of calculating your home's value.
- Consult with architects, builders or assessors if you don't trust your estimates or you want reassurance.
- Update your estimates yearly to reflect current market rates on labour, building materials and other costs.
- Consider adding a safety net to your policy if you live in an area that is prone to wild swings in the cost of raw materials.
- Base the value of your contents on how much it would cost to replace them new, not how much they are worth in their current used state.
- Keep track of all new items that you bring into your home and add their value to your sum insured when the value increases substantially.
Avoid underinsurance and reevaluate your home insurance