Are You Underinsured?
The purpose of insurance is to ensure that all that is important to us is adequately protected. However, despite copious amounts of insurance deals available, research suggests that many Australians do not have an adequate home and contents cover.
For most Australians, this means that their ability to recover from a loss is limited despite believing that they are fully protected.
According to the Insurance Council of Australia (ICA), underinsurance is a prevalent issue within Australia. Choosing the correct insurance for your home is not a difficult task, however, it does take time and consideration to ensure that it is adequate to the value of your home and contents. Here’s what you need to know:
What is Underinsurance
Underinsurance occurs when an individual does not have adequate insurance to cover the cost of loss or damage to the things they own (or not at all insured for those belongings).
Generally, a home and contents insurance is considered underinsured if the policy covers 90% or less of the rebuilding costs of their property. Some individuals choose to undervalue their home and contents, however, for most Australians, it is only when making a contents insurance claim that many discover they are underinsured.
If you feel the level of protection you receive is not enough, you’re not alone. The ICA reported that 83% of households believe they may be underinsured when it comes to home and contents insurance.
So how can you find out if you’re underinsured and, if you are, what should you do?
Find Out What Insurance Policy You Are On
The type of policy you receive determines the level of return when claiming loss or damage. For home and contents insurance, there are two main policies available:
- Total replacement:
- This means the insurer will pay the cost of rebuilding your home to the standard it was before the event you claimed for, minus the excess.
- Typically, the insurer will assess the damage and/or loss and calculate the amount.
- Sum insured:
- The insurer will pay up to a certain amount.
- This has been set out by yourself and the insurer.
What’s Included and Excluded in Your Policy
If your policy does not cover the total value of your home and contents, it means you will need to pay the additional costs when making a claim. Further, depending on your policy, even a partial loss (such as water damages to your kitchen) may also require you to pay additional costs. Some contracts have an ‘averaging’ clause which reduces the insurer’s requirements to pay based on the percentage of your cover.
For example, if your policy covers you for 35% less than the true value of your contents and you make a damage claim of $50,000, the insurer may reduce your claim by 35%, to $32,500.
Consider the value of your home and contents as well as your insurance policy – are you underinsured?
How to Avoid Being Underinsured
When considering your insurance policy there are a few rules and considerations you need to take into account.
- Be aware of the housing market and rebuilding costs.
For most, our home and contents are going to be our life’s most valuable assets. Consider the cost of rebuilding to meet new bushfire and/or building codes, council applications, fees of architects, builders, and surveyors, rent for the period of a rebuild, and demolishing and removing debris.
- Discuss with an insurer about your level of cover.
Although online calculators are available to calculate the approximate amount of cover you require, speaking to an insurer is an assured step that you won’t be underinsured. As MCG Quantity Surveyor, Marty Sadlier stated, online calculators, have ‘long-term evidence’ of failing as their estimates are not accurate. It should also be remembered that the resale of your home will be different from rebuilding costs. An insurer can help identify what types of risks you are exposed to, as well as the likelihood and potential impact.
- Take out a policy with a ‘safety net’.
If you have a sum-insured cover, ask your insurer if there is a ‘safety net’ or underinsurance cover. This covers individuals for up to 30% more than the agreed value of rebuilding your home. It also allows you to potentially claim a greater amount than what you’ve been insured for.
- Review your policy and contents regularly.
Consistently compare and review your policy, especially if you have had any renovations, home improvements, or purchased a valuable asset (such as a TV) that needs to be included in your insurance. It is also recommended to do an inventory of your home to understand what contents you have and their worth. On the other hand, you may also be overinsured particularly if you have paid off your mortgage or your kids have moved out.
- The cheapest policy is not always the best
Make sure you read and understand the Product Disclosure Statement (PDS) and policy documents. Just because something is cheap does not imply good value. Similarly, an expensive cover may also provide little value. Reading the PDS will inform you on the level of cover and how adequate the cover is.
If you have questions about whether you are underinsured and want to work with an experienced broker today, get in contact with the team at Provide Insurance.