When was the last time you checked your home insurance?

Trudie McConnochie has interviewed a spokesperson from the Insurance Council of Australia for Real Insurance. Please always conduct your own research and get expert advice before making any financial decisions.

When was the last time you checked your home insurance? Since your home could be your most valuable financial asset, it can be important to make sure you have enough insurance to cover it – unfortunately, lots of Australians don’t.

According to a spokesperson for the Insurance Council of Australia (ICA), “As many as 84% of Aussie homeowners might be underinsured, which means they don’t have the right cover for home or contents, or their home is insured for less than its replacement cost (or they don’t have any home or contents insurance at all).”

So, what does this mean for your average homeowner? Unexpected events, and even disasters, can and do happen to homeowners. Fire, flood other problems can cause damage. This means that it’s more important than ever to check your home is adequately covered.  

“Underinsurance makes it difficult for policyholders to resume the same standard of living they had prior to the event, whether it’s rebuilding their home if their property is badly damaged or destroyed, or replacing their belongings to the same standard,” the ICA spokesperson says. “Being underinsured can erode savings and investments, deplete assets or result in significant financial hardship following a partial or total loss.”

How do you know whether you’re underinsured?

How it happens

Sometimes people are intentionally underinsured, but sometimes they simply haven’t realised it.

The ICA says people can inadvertently become underinsured when they’ve done renovations, home improvements or upgraded home items but haven’t increased their cover to reflect the increased value of their home and contents.

If you’ve owned your house for a while, underinsurance can potentially creep up on you – for example, you’ve acquired more belongings over time and now your contents cover isn’t enough, or the cost to rebuild your house has increased, due to higher building and supply costs, and changes in building regulations.

Underinsurance can also occur because people have guessed their level of cover without doing accurate calculations, or haven’t understood what insurance covers, the organisation says. For example, owners of units might mistakenly assume strata fees cover their contents, instead of just the building insurance.

Another common mistake is people believing they can ‘self-insure’ without understanding how expensive a rebuild would be, or choosing a lower level of cover to reduce premium costs, the ICA adds.

Understanding your home policy

Your home insurance falls into one of two categories: ‘total replacement’ or ‘sum insured’. Total replacement means in the event of an eligible claim, the insurer will pay to rebuild or repair your home to the standard it was prior to damage, minus the excess. Sum insured means the insurer will pay up to the amount agreed in your policy – and if that falls short of your repair or rebuild costs, that’s when you’re underinsured, and your insurance won’t meet your needs.

Even if you’re only claiming for a partial loss – say, repairs to part of the house rather than a total rebuild – if your policy has an ‘averaging clause’, your insurer may reduce the amount it pays based on the percentage you’ve covered for. That means if you’re underinsured by 25%, your payout may be 25% less.

Some sum insured policies, however, offer a ‘safeguard’ or ‘safety net’ of up to 30% if there’s a total loss, so check your policy.

When does my policy need updating?

It’s a good idea to check your home insurance cover regularly to understand what it covers, what’s excluded and whether the sum insured reflects your home’s current rebuild value. Similarly, make a point of regularly reviewing your contents policy to make sure it reflects the current value of your belongings.

Here are the ICA’s tips for making sure your insurance cover is adequate:

• Review your policy’s sum insured when it’s up for renewal to make sure the cover isn’t eroded by inflation and that improvements or additions to the property have been included.
• Use home and contents calculators to work out the building and contents cover required. If the amount the calculator shows is different to the sum insured, consider reviewing all assets in greater detail by carrying out a room-by-room inventory. There are calculators available at insurancecouncil.com.au or your insurer may have one on its website. Moneysmart.gov.au recommends using a calculator with ‘elemental estimating’ rather than ‘cost per square metre’.
• When calculating the sum insured on your home, factor in common additional costs such as demolition, debris removal, architectural, engineering and council costs, and structures external to the home such as sheds and fences.  
• Closely read the product disclosure statement (PDS), which sets out policy details.  

Do you have questions about home and contents insurance? Check out these frequently asked questions.