Being one of your biggest financial investments, it makes perfect sense to protect your home from unforeseen events such as natural calamities and man-made disasters – and most Australians do.
According to the Insurance Council of Australia, between 90%-95% of all homes owned by Australians have building insurance. However, the big question is whether homeowners have enough coverage.
According to a recent survey, more than 80% of respondents felt that their homes and personal possessions were underinsured. This number includes homeowners as well as renters.
Underinsurance, if proven to be true, can lead to a financial disaster for them at a time they are already feeling extreme emotional stress. It is possible to avoid being underinsured by having the right knowledge and preparation.
What does home insurance cover
Home insurance coverage comes in two main types: sum-insured cover – where compensation is based on an estimated cost of rebuilding your home if it was entirely destroyed – and total replacement cover – which provides coverage for the overall cost of repairing or rebuilding your home to the same standard.
Most home insurance policies offer financial protection if the property’s physical structure and its contents are damaged or destroyed because of the following:
- Explosion and fire
- Stormwater and rainwater
- Lightning strikes
- Earthquakes and tsunamis
- Trees and other fallen objects
- Vandalism and theft
- Bursting pipes
Additional coverage for accidental damage, floods, and electric motor burningout is often available as an add-on and can increase premium prices. You can also get legal liability coverage for financial protection against claims of bodily injury or property damage within your home’s premises.
How much does home-insurance cost?
Cost of home insurance can be affected by many factors. Your claims history, the location of your home, and any features can all impact the cost of your policy.
These parameters are subject to change for every policyholder so it is hard to give an exact estimate of the cost of home insurance premiums. Financial comparison websites indicate that building insurance costs can start at $800, and go up to $4,000 per year. Contents insurance ranges from $300 to over $800 per annum.
What happens if your home is not insured?
Underinsurance refers to insurance that does not provide enough coverage to cover the loss or damage to your property and possessions. According to most insurance companies, a policyholder will likely be underinsured if they have coverage that is less than 90% of the cost to rebuild their home and replace their damaged belongings.
Your insurance policy may not cover all costs associated with rebuilding or replacing property and possessions. You will have to pay the difference out of your own pocket. This can be a huge financial and emotional burden, especially for those who have experienced the trauma of losing their home.
To illustrate, let’s say your home carries an insurance policy with a cover limit of $400,000 and it was totally destroyed in a bushfire. Your insurer will inform you that they have completed an assessment and determined that your home would need to be rebuilt to the same standard as before. You will have to pay $350,000, while you worry about finding a place to live.
How can you avoid becoming underinsured
Although being underinsured can have dire financial consequences, it’s possible to avoid them. Here are some ways to avoid falling behind on your insurance.
1. Learn the true cost to rebuild your home
Your home’s market value may be significantly less than the cost of rebuilding it. A licensed builder or accredited valuer can help you get an exact estimate of the costs involved in rebuilding your property. This team of professionals is trained to assess the cost of your property. They will take into account a variety of factors such as legal and architectural fees, demolition and debris removal, choice of building materials and possessions replacements.
2. You should take inventory of all your belongings
A list of all your belongings can make it easier to determine how much it will cost you to replace them. You can download a comprehensive home inventory checklist from ICA’s website. Many insurance companies offer replacement cost calculators that policyholders may use.
3. Learn what’s covered by your policy
Your insurance contract includes your certificate of insurance as well as the product disclosure agreement. Be sure to carefully read your PDS as it tells what your policy’s inclusions and exclusions are, its maximum claim limits, and other terms and conditions. You may find some unfamiliar terminology in the PDS. It is best to consult your agent if you have any questions.
4. Your policy should be updated regularly
Make sure to update your home insurance policy if you do any major renovations or buy valuable property like artwork or jewellery. Unexpected events and disasters can strike at any time. If you don’t notify your insurance provider, you might not be able make a claim for loss or damage.
5. Add an underinsurance policy
Insurance companies may offer underinsurance coverage. This covers you up to your maximum limit. This often applies when your home’s value rises after a cover limit has been set.