It can be tough to estimate how much it would cost to repurchase items after a break-in, or even rebuild your house after a major natural disaster. It’s one reason why underinsurance is common in Australia.
How much home building insurance do I need?
There are two common methods for estimating the cost to rebuild a home, and they are very different:
- Cost-per-square-metre: This method involves estimating the cost to rebuild based on the size of your home. It's relatively quick and simple, though it may not accurately represent how much it would actually cost to rebuild from scratch and could leave you underinsured.
- Elemental estimating: This method is more intricate and takes into account many factors involved in repairing or replacing your home to get a more accurate indication of how much you may want to insure the property for.
Some of the factors you may want to consider for elemental estimating include:
- What would it cost to rebuild your home today, not when the home was originally built
- The style and age of the building
- The materials used in the building, its finishes, and the quality of fixed appliances
- The structure of the building; how many stories and rooms, is there a deck, garage, or pool?
- The cost of hiring professionals such as an architect, engineer, surveyor, and lawyer
- Council approval plans, permits and fees
Another potential consideration is if your insurer will pay for temporary accommodation if your home is damaged and rendered uninhabitable. This could be important if a bushfire, flood, or other natural disaster leads to a shortage of available builders, which could mean lengthy delays getting your home rebuilt.
What are the main types of home insurance?
There are three main types of home insurance available in Australia:
- Building insurance: Covers damage to the structure of your property only
- Contents insurance: Covers damage or loss of the possessions held inside your property
- Building and contents insurance: Combines cover for both your building’s structure and your possessions, possibly for a discount compared to taking out separate home insurance and contents insurance policies.
Each type of insurance could leave you at risk of underinsurance if you don’t have enough cover in the policy.
Total replacement vs sum insured
There are generally two types of building insurance policies:
Total replacement
Total replacement cover includes all the costs to rebuild your home to the standard it was prior to the event that led you to make a claim, minus any excess amount listed in your policy.
An insurer will often conduct its own assessment of the damage or loss that occurred to calculate the amount it will pay.
While you’re generally less likely to be underinsured with total replacement cover, fewer insurers offer this type of cover, and it can also be more expensive.
Sum insured
Sum insured cover is where you specify a maximum amount of money you would be covered for when you take out the policy, based on an estimate of how much you believe it would cost to rebuild your home to its current standard if it was completely destroyed by an insured event. This introduces the risk that you may be underinsured.
To help mitigate some of the underinsurance risk, some insurers offer a 'safeguard' or 'safety net', which may add up to 30% to your sum-insured amount in the event of a total loss.
How much home contents insurance do I need?
How much contents insurance you need will depend on the possessions you own and keep in your home. You can base the sum of your home contents insurance on how much it would cost to replace existing goods with new items. For example, your couch might be quite old and therefore not worth much, but replacing it with a similar, new couch might cost upwards of $1,000.
How do you value your contents correctly?
Depending on how much stuff you have, calculating its replacement value could be a simple task or a daunting project.
You might start by making a list of all the possessions you want insured, going room by room through your house and noting down anything of importance you would want to be covered, then research the current purchase price of these items. If you’ve held onto the receipts from your purchases, you could also consider their original costs.
And some items you may think have little value could actually be worth more than you think. For example, that old vinyl collection may include some much sought-after (hence, valuable) records.
Once you have your list, remember to update it regularly, especially when you purchase a new item you might want insured. You can then review your cover and, if necessary, increase the amount you're insured for.
Can an insurance calculator tell me how much cover I need?
Online insurance calculators can be a helpful place to start when working out how much building or contents cover you may need, but consider the result guidance, not gospel.
A calculator may use a simple cost-per-square-metre figure or a more complex elemental approach to estimate rebuilding costs.
More basic web calculators might simply apply an average figure to similarly sized homes, while results may vary greatly from calculator to calculator.
Will the insured value of your home be adjusted for inflation?
Construction costs, including labour and materials, can rise over time thanks to inflation, but your home’s sum insured value may not. Some home insurance providers will increase the sum insured value (if you’ve chosen this method) of your home automatically each year in line with inflation, but that's not true of every insurer.
It’s worth checking your home insurance provider's process for inflation-proofing your policy. If it's not done automatically, you can update your sum insured value annually to help reflect current rebuilding costs.
Similarly, if your insurer won’t automatically change the sum insured value of your contents insurance, including specified and portable contents, it may be worth checking it each year. This could be especially true if you own assets like jewellery or art, which may grow in value over time.
Why is underinsurance so common?
Underinsurance is when your policy will not fully cover you for the value of your home and contents, meaning you could be out of pocket for repairs and replacement costs if your home was damaged or destroyed.
There are many reasons underinsurance may be common in Australia. The set-and-forget factor is one. you might simply take out home and contents insurance when you first buy your home, move in, and then forget about it.
You may leave your contents policy as is after getting an expensive gift or making a major purchase that you keep at home, or forget to update your home building policy when you finish renovations that would add to the cost of rebuilding your home.
Another possible reason for underinsurance is that home insurance companies in Australia generally leave it to you to estimate how much it would cost to rebuild your home. This rebuilding cost is different to the price you paid for the property, and different to its current market value. Incorrectly estimate these costs, and therefore the level of cover required for your home and contents, could leave you underinsured.
If you’re still not sure how much building insurance cover you need, you could pay an expert to value your home.
Why should I compare different home insurance policies?
It’s important to not only review your cover regularly to make sure it’s enough to suit your needs, but to compare it with other policies on the market. For many people, their home is their most valuable asset, and it’s important to consider the level of insurance you’ll need.
Keep in mind that the cheapest policy may not provide the cover you require, so it’s a good idea to read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) of any product you’re considering and compare home insurance policies before making a decision. Some home home insurance providers may offer introductory deals and discounts when you take out a new policy or for the use of home alarms and other security systems (a factor also worth considering).
