Is your home underinsured?
 | Research shows that many people do not have enough insurance cover on their home. See Getting home insurance right - a report on underinsurance of home buildings in Australia. |
Research shows that many people do not have enough insurance cover on their home. See Getting home insurance right - a report on underinsurance of home buildings in Australia.
This can be extremely costly in the unfortunate event of losing your home (for example, in a natural disaster). One person who lost their home in the Canberra bushfires of 2003 (and who thought they had enough insurance) told us: ‘We now have a mortgage of $140,000 when we owned our home outright before.’
Our research has shown that increasing your insurance cover may not cost very much, and, if you shop around, you may even be able to get more cover for the same price, or even for a lower price.
Here’s how to make sure you have enough of the right home insurance cover.
What is underinsurance?
Tools for estimating the cost of rebuilding your home
Web calculators
Shopping around
Also see FIDO's tips on making sure you know up front what to expect from your policy
What is underinsurance?
Recent surveys in Australia have found that between 27% and 81% of home owners were underinsured. This means that their home is insured for 90% or less of the cost of rebuilding it. Between 7.5% and 59% of owners had only insured their home for 70% or less of the cost of rebuilding.
There are a number of reasons why you might not have enough home insurance cover:
- It can be hard to know what it would cost to rebuild your home, and you might not know how to check the cost of rebuilding
- You might have had your insurance policy for 5 years, 10 years or more. You might not be sure how much the cover has been increased each year, or whether you still have enough cover.
- If you have completed renovations recently you need to increase your level of cover, if you haven't already done so.
| TIP! | Even if you think you have enough insurance, you should check your level of cover, particularly if you haven't increased it for a number of years. |
You might be aware that you don’t have enough cover, but you can’t afford to pay more for your home insurance. You might be surprised—just because house prices have been going up doesn’t mean your insurance premium will have increased at the same rate. FIDO's advice is to shop around
Tools for estimating the cost of rebuilding your home
Estimating the cost of rebuilding a home is a very complex task.
Home owners usually need professional help to do this. However, it’s often not practical to get this help from a builder, architect or quantity surveyor (even if you are referred to one of these professionals for advice).
Warning
Some home owners estimate the sum insured by subtracting the value of the land from what you would get if you sold your home now. For example, you may have bought your home for $300,000 and the rates notice says the land is worth $200,000. The rebuilding costs are likely to be much more than $100,000 (the difference between these two figures). This method will leave you underinsured and FIDO advises against using this method. |
Web calculators
Many insurers now offer ‘web calculators’ to help you work out the ‘sum insured’ (that is the amount of cover in dollars) for your home. These calculators can be useful for working out how much cover you need, but not all calculators are the same. They use two different methods of estimating rebuilding costs:
- The cost per square metre method uses a calculation based on the size of the house and the material it is built from.
- The elemental estimating method involves assessing in detail the different elements of the building (including individual features of the home) to price rebuilding costs ‘from the ground up’, using local wage and material rates and other construction data. A detailed series of questions allows these figures to be applied to the individual house.
In 2005 we reviewed nine calculators using five houses in four different states. This review found some calculators produced estimates which were much lower than those produced by other calculators.
The following graph shows the sum insured suggested by four different web calculators for a Federation period house in Melbourne.
If Insurer A’s estimate is accurate, then the sum suggested by Insurer D would leave you out of pocket by almost $195,000.
Therefore, although web calculators can be a useful way of getting estimates of rebuilding costs, you need to be aware that there are differences between calculators, and that some are more reliable than others.
Basic web calculators
The more basic web calculators have limitations:
- They apply an average figure to each house.
- They cannot take into account features that can increase rebuilding costs (such as whether your home is built on a slope, has higher quality finishings, or is more than 40 years old).
These simple calculators ask you less than 10 questions and may not take into account all the features of your home. They are more likely to give you an average figure that could be too high or too low.
Best web calculators
The best web calculators are the ones that ask lots of questions about your home, including questions about whether your house is on a slope, what is the quality of the internal finishings and how old it it. These calculators may take up to 15 minutes to complete, but they will give you a more personalised estimate of what it will cost to rebuild your home if it is destroyed.
Five tips for using web calculators to estimate your rebuilding costs
| 1 | Use a number of calculators that ask different questions to see what figures they come up with. This gives a much better idea of rebuilding costs than using just one calculator. |
| 2 | Think about your home—does the calculator ask you when was it built, do you have quality finishings, is it built on a slope? |
| 3 | Does the calculator ask you your postcode or merely which state you live in? If it only asks you for your state, the calculator is likely to be using average figures for building costs that may not be right for your home. It could mean that the calculator produces a figure that is too low for those people who live in places where building costs are higher than the State average. |
| 4 | Does the calculator produce a final figure or does it ask you to do your own estimates for particular costs? Do you know how much to add for those costs? If you don’t, find a calculator that will do it for you. |
| 5 | If someone you know has just built a new home, test the calculators by seeing whether the figure it suggests is close to what it cost your friend to rebuild. This may give you an idea about which calculators are more accurate. |
In an extract from our report of the Canberra bushfires, read more about using web calculators to estimate the cost of rebuilding.
Shopping around for home insurance
Some home owners are reluctant to increase their sum insured because they think it will mean paying a higher insurance premium. By shopping around, however, you might be able to get more cover for the same price. (Make sure you always check any differences in the cover offered by different insurers, though, as well as the price.)
The following chart shows what a $500 premium can buy from four different insurers for a brick veneer house in Engadine, NSW.
Insurer Z only insures you for $195,000, while Insurer W insures you for $368,000 - a difference of $178,000 for the same $500 premium. You also need to consider any differences between the policies offered by these insurers. But you will generally be better off where you have a significantly higher level of cover.
Compare prices between different insurers by using their web calculators to obtain online quotes
To find out more about underinsurance and how to make sure you have enough cover, read our report ‘Getting home insurance right’.
Lots more advice on home insurance
FIDO Website: Printed 07/31/2010
