What is underinsurance? Are you underinsured?
Underinsurance is when someone does not have adequate insurance to cover the cost of loss or damage to the things they own, or is not insured at all for those belongings.
As far as material goods go, your home or property is likely to be your most valuable asset. Insuring it for less than what it would cost you to rebuild makes about as much sense as insuring a Porsche at a Hyundai price. You might get away with it, but at some stage the gap in cover is going to come back to haunt you.
How many people do not have home and contents insurance?
The David Murray Financial System Inquiry’s Final Report showed that 29% of homeowners and 67% of renters in Australia do not have any form of contents insurance.
How many people have home and contents insurance but are still underinsured?
Underinsured home insurance is surprisingly common, it would seem. The Insurance Council of Australia estimates that more than 40% of households fail to correctly assess the value of their home and contents, so there’s a real chance you could be under-insured.
Underinsured home insurance hurts homeowners at claim time
Cheap insurance may not be so cheap when you make a claim. Apart from not receiving enough home insurance money to cover the cost of your loss, there’s an added risk that can be far greater. If you have significantly under-insured your home or contents, your insurer may have the right to pay only part of any loss because you’ve insured for only part of what it’s worth.
Let’s say you insure your home for $150,000, but it’s really worth $250,000. A bushfire sweeps through the area and does $80,000 damage to your home. Your insurer may have the right to reduce the payout in proportion to the level of under-insurance.
In this case, there might be a payment of only $48,000. Sadly, that is nowhere near enough to repair or replace a $250,000 home.
Not many of us have the skills needed to accurately assess how much our home would cost to rebuild if it was destroyed.
Luckily, most insurers have insurance calculators on their websites to help you estimate what you would be up for and consequently, what value home insurance or building insurance you should be looking for. The calculators will take you through a step-by-step process starting with your postcode, as building costs vary in each state. Then they should ask you for the type and style of your house, what it is made from, finishes, size, how many bedrooms, features, to calculate how much home building insurance you need. All of this is taken into account, and then you pit your estimate up against the insurer’s calculator.
Not willing to rely upon your own or the insurers estimate you can always hire a property valuer to undertake a valuation on the property. Included in this service will be an estimate on the costs to replace the building (home).
When it comes to contents insurance, or even personal effects insurance, doing a household inventory of everything you own in your home is one of the most important steps you can take to protect your items. An inventory can help you keep track of everything, from your electronics and appliances to your jewellery and DVD collections. This can be invaluable when deciding how much contents insurance coverage you need and also at time of claim
Prevent underinsurance: Cut the cost, not the coverage
Before you decide you can’t afford the full level of insurance coverage you need, why not take another look at the options? We can help you there, with our website comparing more than a hundred home and contents insurance policies:
If your in the market for a home insurance policy the comparison table below is a Snapshot of the current market offerings for building and contents cover with links direct to the providers’ website. Please note the table below is formulated based on the policy holder being located in NSW or ACT for up to $550,000 replacement value and has been sorted by our Star rating (highest to lowest).
We have also identified 10 ways you can cut the cost of your home and contents insurance. And don’t forget the home insurance discounts on offer if you buy online, have your car and your home insured with the same company, or stay loyal to an insurer over the years.
If you’re a renter in a low income earning situation, you can apply for a low cost insurance policy to cover your home, contents, and car. For example, Essentials by AAI, which was launched through a partnership between Suncorp and Good Shepherd Microfinance, won our 2016 Innovation Award. Another option is Insurance For That, created through a partnership between IAG and – again – Good Shepherd Microfinance. Naturally, this is not a product recommendation and you should check whether such a policy would provide adequate coverage for your belongings when considering home and contents insurance.
To the extent that the information in this report constitutes general advice, this advice has been prepared by CANSTAR Research Pty Ltd A.C.N. 114 422 909 AFSL and ACL 437917 (“CANSTAR”). The information has been prepared without taking into account your individual investment objectives, financial circumstances or needs. Before you decide whether or not to acquire a particular financial product you should assess whether it is appropriate for you in the light of your own personal circumstances, having regard to your own objectives, financial situation and needs. You may wish to obtain financial advice from a suitably qualified adviser before making any decision to acquire a financial product. CANSTAR provides information about financial products. It is not a financial provider and in giving you information it is not making any suggestion or recommendation to you about a particular financial product. Please refer to Canstar’s FSG for more information.