Are You Really Covered? Ten Tips for Avoiding Underinsurance

It can be hard to estimate the true cost of disaster
Photo: Kiwi NZ, Creative Commons

Even the best insurance policies can leave you exposed if you don’t insure for an adequate amount.

The problem is that it’s difficult to work out how much it would really cost to rebuild if disaster happens.

Study after study shows that Australians tend to underinsure. Every time there’s a major disaster, such as the recent bushfires around the nation, we hear about more cases.

If you insure your home or investment property for $200,000 and the actual rebuild costs are $400,000, you risk being caught out financially – and possibly being forced to sell.

“Don’t be one of the many people who only read their policy document after a loss.”

It’s often more expensive to replace a damaged property than to build from scratch because there’s demolition to consider, and construction costs rise over time. Another common trap is to forget to include renovations and improvements in your sum insured.

Most people don’t deliberately underinsure, but it can be challenging to accurately estimate the costs of rebuilding, and online calculators are not always accurate.

Here are a few tips to help you set an accurate figure:

Approach a Quantity Surveyor

The most accurate way to estimate rebuilding costs is to approach a quantity surveyor for a written replacement cost estimate. Other professionals who can help include architects and builders.

Seek Out Accurate Online Calculators

If you use online calculators, choose ones that ask detailed questions. Compare the answers from at least three others, then add a margin for safety – and ask a builder for an opinion on the final figure you come up with.

Keep Up With Rising Construction Costs

Increase your sum insured every year to keep up with construction costs. According to the Australian Bureau of Statistics, the cost of building a new home rose by an average of 7.7 per cent each year in the decade to 2008.  

Include Supplementary Costs

Remember to include supplementary costs associated with rebuilding, such as demolition, professional fees, council fees, gardening costs, and the cost of meeting modern building standards.

Don’t Skimp

Keep the big picture in mind – deliberately underinsuring your property might save you a few hundred dollars in premium, but lose you tens or hundreds of thousands if you need to claim.

Do Your Homework

Don’t be one of the many people who only read their policy document after a loss.

Shop Around

Shop around when renewing your insurance but remember to look for value and features, not just the cheapest price.

Take Out Landlord Insurance

If you’re a property investor and you’re not in a strong enough financial position to cope without rent for six months to a year or more without rent while a rebuild occurs, take out landlord insurance.

Keep Up to Date

Keep your sums insured up to date, accounting for improvements, renovations and new possessions you acquire.

Maintain Records

Take photos of your investment property to help you remember what fixtures and fittings are in place should you need to claim.