How much should I insure my house for?

Homes come in many shapes and sizes – from one-bedroom apartments to multi-million-dollar mansions. Regardless of its grandeur, or lack thereof, it’s still a serious and substantial investment for most homeowners.

But how do you put a price on your home for insurance purposes? It can be tough to estimate how much it would cost to rebuild in the event of damage due a natural disaster or some other tragedy.

That could be one reason why underinsurance is common in Australia. Underinsurance is when your policy will not fully cover you for the value of your home and contents, which means you would be out of pocket for additional repairs and replacement costs if you need to make a claim.

How much home building insurance do I need?

To get started in calculating how much insurance you need, the Insurance Council of Australia’s website has some online calculators for both building and contents. Some insurance companies have their own online calculators.

It’s a good idea to look into a combination of calculator-based costs and your own figures to estimate how much home building insurance you would need to rebuild your home from scratch.

There are two common methods for estimating the cost to rebuild a home, and they are very different:

1. Cost-per-square-metre: This method involves estimating the cost to rebuild based on the size of your home. This method is simplistic which means it may not represent how much it would actually cost to rebuild from scratch and that could leave you underinsured.
2. Elemental estimating: This method is more intricate and takes into account many factors involved in repairing or replacing your home.

The Federal Government’s Moneysmart website advises using a calculator that uses ‘elemental estimating’ because it asks you for lots of details about your home. For example, you may consider:

• what would it cost to rebuild your home today, rather than the cost when the home was originally built
• the style and age of the building
• the materials used in the building (e.g. is it predominantly timber, brick veneer, full brick?) and its finishes (linoleum floors versus marble benchtops)
• the structure of the building, how many levels and rooms, is there a verandah or deck?
• whether there is a garage or carport
• whether there is a pool
• the type of air-conditioning, solar power, or other mod cons in the building
• whether the land is difficult to access as this could increase the cost of construction
• the cost of hiring professionals such as an architect, engineer, surveyor, and lawyer for the legal side
• council approval plans, permits and fees
• regional differences (building in Toowoomba may be cheaper than building in Sydney)
• if your policy covers demolition, debris removal, levelling or landscaping

You should also check to see if your insurer will pay for temporary accommodation if your home is damaged and uninhabitable. This could be important if a bushfire or other natural disaster results in a shortage of available builders leading to lengthy delays in getting your home back up and running.

Total replacement vs sum insured

Building insurance policies come in two types: total replacement or sum-insured policies.

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 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.

The Moneysmart website says “you’re less likely to be underinsured with total replacement cover” but not many insurers offer such cover and it can be more expensive.

Sum insured cover is where you specify the amount of cover you would like when you take out the policy. This introduces the risk that you may be underinsured.

Moneysmart advises to avoid being underinsured with this cover, check if your insurer offers a ‘safeguard’ or ‘safety net’. This means they add up to 30% to your sum-insured amount in the event of a total loss.

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How much home contents insurance do I need?

The amount of home contents insurance you need will depend on what you own. It can be overwhelming to think about everything that’s in your home, so it’s a good idea to break it down into a room-by-room list.

“Making an inventory of belongings assists with understanding how much it would cost to replace existing contents with new items,” said an Insurance Council of Australia (ICA) spokesperson.

For example, your couch might be quite old and only sell for $50 on Gumtree, but the replacement cost for a similar but new couch might be $1,000 or more.

Some items you may think have little or no value, could now be worth more than you think. That old vinyl record collection may include some much sought-after – hence valuable – titles.

“An inventory may also be useful if a claim needs to be made,” the spokesperson said.

We’ve a handy checklist of things to consider when assessing your contents insurance needs.

How do you value your contents correctly?

When it comes to contents insurance, it’s important to have an accurate idea of the replacement value of your belongings, so that if they’re lost or destroyed, you’ll be able to replace them. Depending on the number of possessions you have, calculating their value could be an easy task – or potentially a daunting one! To help out, one strategy might be to make a list of all the possessions you want insured, going room by room in your house and noting down anything of importance that you would want to be covered. Once you have this list, remember to update it every now and then, 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. It can also pay to keep receipts for your purchases, so you can remember how much they cost.

Can an insurance calculator tell me how much cover I need?

Insurance calculators can be a handy place to start when calculating the amount of cover you may need, but it’s a good idea to use the result as a guide only.

Some calculators may use the two different methods (mentioned earlier) to estimate rebuilding costs – a simple cost-per-square-metre or a more complex elemental estimating approach.

The more basic web calculators may be limited because they may apply an average figure to each home and its contents. The results may also vary greatly from calculator to calculator.

So it’s a good idea to treat any insurance calculator as a very general estimate of your needs and not a detailed or personalised assessment.

Why is underinsurance so common?

There are many reasons why underinsurance may be so common in Australia.

The set-and-forget is one factor. It can be easy to fall into the trap of taking out home and contents insurance when you first buy your home and move in, and then forget about it.

For example, you may forget to update your contents policy when you get an expensive gift or item that you keep at home, or forget to update your home building policy when any renovations increase 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.

“Remember, your home’s sum insured amount is not the price you paid for the property, or what its market value is,” as GIO insurance explains.

“It’s your estimate of how much it would cost to rebuild.”

An ICA spokesperson said this “guessing the level of cover required” for both home and contents could lead to you being underinsured.

If you’re still not sure what level of building insurance cover you need you could always get an expert valuer 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 others on the market.

“Check your cover regularly, review the sum insured on policies each time they come up for renewal,” said the ICA spokesperson.

But keep in mind that the cheapest policy may not always provide the cover you require, so it is a good idea to read the product disclosure statement (PDS) and target market determination (TMD) of any product and compare policies before making a decision.

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