How much should I insure my house for and how much home insurance cover do I need?

How can you work out how much you should insure your home for? Here’s a guide to some of the key things to think about.

Homes come in many shapes and sizes – from one-bedroom apartments to multi-million-dollar mansions. Regardless of its grandeur, or lack thereof, it is still a serious and substantial investment for most homeowners. But how do we put a price on our home for insurance reasons?

In this article, we examine:

What is underinsurance?

Underinsurance is the term used when an insurance policy does not cover the full replacement value of, or cost of repairs for, whatever it is the policy is meant to cover. With home and contents insurance, for example, this could mean that a home owner would be unable to fix or fully rebuild their house if it suffered major damage, or would be unable to replace stolen or damaged items.

Underinsurance is common in Australia, according to the Insurance Council of Australia (ICA). A survey conducted by ICA found that while about 90-95% of owner-occupied homes in Australia had home building insurance, 83% of home owners believed they could be underinsured for home and contents insurance.

There are two main reasons why underinsurance could be so common in Australia.

  1. The set-and-forget factor – it can be easy to fall into the trap of taking out home and contents insurance when we buy our home, and then forgetting about it. We may not think of updating our contents policy when we get an expensive gift for Christmas, buy a new vacuum cleaner, or update our home building policy when we renovate our home. To avoid underinsurance, home owners are advised to do a regular inventory of their home and contents insurance and adjust their cover accordingly. It is also a good idea to look at the premium before the renewal of a policy to determine whether it is providing value for money.
  2. Estimation errors – It can be tricky to work out exactly how much a building or its contents are to replace. Unlike in some other countries, home insurance companies in Australia ask consumers to estimate how much it would cost to rebuild their home for themselves. However, this can be a difficult number to estimate as there are many variables that need to be considered.

Compare home and contents insurance

If you’re comparing home and contents insurance policies, the comparison table below displays some of the policies currently available on Canstar’s database for an Australian aged under 50, seeking cover in NSW or ACT for a cost to replace building and contents of below $550,000. Please note the table is sorted by Star Rating (highest to lowest), followed by provider name (alphabetical) and features links direct to the providers’ websites. Use Canstar’s home insurance comparison selector to view a wider range of policies.

How much home building insurance do you need?

To get started in calculating how much insurance you need, there are a number of online calculators available. In reality, it could be a wise 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 how large a home is. This method is simplistic, and often does not accurately represent how much it would actually cost to rebuild from scratch.
  2. Elemental estimating: This method is more intricate and takes into account features such as sloping land and quality of finishes, which can really bump up building costs.

For example, if you are calculating the amount of home building insurance you may need using the elemental estimating method, you may consider these points:

  • What would be the cost of rebuilding your house today, rather than when you originally built the home?
  • What style and age is the building?
  • What materials are used in the building (e.g. predominantly timber, brick veneer, full brick) and its finishes (e.g. linoleum floors vs marble benchtops)?
  • What is the structure? How many levels are there? Is there a verandah or deck?
  • Is there a garage or carport?
  • Is there a pool?
  • What type of air-conditioning, solar power, or other mod cons does the building have?
  • Consider whether the land is difficult to access, as this would increase the cost of construction.
  • Consider the cost of hiring professionals like an architect, engineer, surveyor, and lawyer for the legal side.
  • Factor in council approval plans and fees.
  • Keep in mind regional differences (e.g. building in Toowoomba is a lot cheaper than building in Sydney).
  • Check if your policy covers demolition, debris removal, levelling or landscaping – because many don’t.
  • See if your insurer will pay for temporary accommodation while building is in process. This could be important if a bushfire or other natural disaster results in a shortage of available builders and 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 an event you are claiming for, minus the excess (based on the value of your home when you took out the policy, or if you updated it following renovations). Often the insurer will conduct its own assessment of the damage or loss that occurred to calculate the amount that will be paid. According to Moneysmart, properties with this type of cover are less likely to be underinsured, however premiums are usually more expensive and not all insurers offer it.

Sum insured cover is where you specify the amount of cover you would like when you take out the policy. Naturally, the risk of underinsurance is more prevalent with a sum-insured policy.

How much contents insurance do you need?

The amount you may require will depend on what you own. It can be overwhelming thinking about everything that is in your home, so it is a good idea to break it down into a room-by-room inventory.

Consider how much it would cost to replace your items with new products rather than what each item is currently worth. 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 $700.

It could also be a good idea to keep records of receipts and photographs of valuables, to refer to if you ever need to make an insurance claim.

Can an insurance calculator tell you how much you need?

Calculators can be a handy place to start when calculating the amount of insurance you may need, however it is a good idea to take the result with a pinch of salt.

Calculators can also use the two different methods to estimate rebuilding costs, as we discussed above – a simple cost-per-square-metre or a more complex elemental estimating approach.

The more basic web calculators are limited because they apply an average figure to each home. They don’t take into account features that can increase rebuilding costs, like whether your home is built on a slope, uses better quality materials, or has any potential hazards, such as asbestos. The results can vary greatly from calculator to calculator.

Because of this, it is a good idea to treat an insurance calculator as a very general estimate of your needs and not a detailed or personalised assessment.

Compare home insurance

It’s a good idea to not only review your cover regularly to make sure it is enough to suit your needs, but to compare it with others on the market. 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) of any product and compare policies before making a decision. You can compare home insurance policies with Canstar.

Original article posted by Christine Thelander 

Image: Vineyard Perspective/

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