Insurance is about protecting yourself and your family, or your business, from a loss which you otherwise wouldn’t be able to financially recover.
Many Australians don’t have enough insurance, and unfortunately don’t realise until it’s too late. Underinsurance is a very real problem in Australia with many property owners having insufficient insurance cover.
So how does this happen?
Underinsurance happens because people don’t properly value their assets. They’re underinsured or have no insurance at all because they think that the insurance they need isn’t affordable, or they don’t consider their assets worth insuring or worse still, believe they can self-insure.
When purchasing or renewing your insurance, it’s important to strike a balance between cover and cost but it’s also critical that you make an informed choice without leaving yourself short in the event of a claim. Properly protecting yourself and your family, or your business, should be your number one goal.
Before you choose an insurance policy, it’s important for you to remember that all policies have exclusions, caps, limits and other conditions which may vary between insurers, so remember to ask questions when purchasing insurance and read the product disclosure statement (PDS) when comparing different policies.
It’s also worth regularly checking your policy to see how much your insurer will pay and under what circumstances. Check your level of cover regularly, and take into account any changes you have made to your property and any additional assets you’ve purchased throughout the year. Values change over time so make sure they get updated regularly.
Underinsurance is when the value you have insured your property or contents for under your policy is not enough to cover the value of the items you are insuring. Underinsurance can happen in any type of insurance policy. When you are taking out an insurance policy or reviewing your insurance for renewal, the sums insured need to be calculated on the replacement cost of the property and include the cost of removal of debris and any additional costs that may be needed to replace the property. The cost of full insurance generally isn’t that much higher, but having inadequate cover at the time of claim can be devastating and won’t offer you protection against the potential financial impact to you and your family.
A property is said to be underinsured if an insurance policy covers 90% or less of the rebuilding costs. Some insurance contracts have averaging provisions that reduce the sum paid out by a certain percentage when the sum insured is less than the value of the insured asset.
Being uninsured or underinsured may end up not being a cheaper option, as the cost of the event will be carried by someone – whether that’s you, your family, your friends or by the community around you. Taking the time to make sure you have enough insurance and knowing what’s covered means you know where you stand in the event of a loss.
Factors contributing to Underinsurance
- A gradual accumulation of possessions – adding up the replacement cost of your possessions room-by-room can give you a bit of a surprise!
- Not accounting for upgraded assets – over time we tend to replace items and belongings with better quality and more expensive items
- Financial priorities – some people choose a budget for their insurance without working out the actual value of their assets
- Increased building costs – these increase each year with current building regulations needing to be complied with and, in the event of a major disaster, increased costs due to demand
Ways to minimise your risk of Underinsurance
- Use home and contents calculators to work out how much cover you may need
- If the amount calculated is different to your sum insured, consider reviewing your assets in more detail
- Make an inventory of all your belongings and assets and work out replacement costs
- Recognise that resale value is different to replacement cost. A builder or professional valuer can help you work out the cost of rebuilding your property and any external structures like sheds and fences. Also consider additional costs such as demolition, removal of debris and any council costs
- Check your cover regularly. Review the sum you have insured on your policies each time you renew them and make sure your cover doesn’t get eroded by inflation
- Make sure you understand the insurance you have chosen by reading the documentation you receive and the Product Disclosure Statement (PDS) which explains the policy terms and conditions in detail and make sure you feel they are suitable for your circumstances
Protecting yourself and your family, or your business, from underinsurance