It can be tough to estimate how much it would cost to repurchase items after a break-in, or even rebuild your house after a major natural disaster. It’s one reason why underinsurance is common in Australia.
How much home building insurance do I need?
There are two common methods for estimating the cost to rebuild a home, and they are very different:
- Cost-per-square-metre: This method involves estimating the cost to rebuild based on the size of your home. This method is relatively quick and simple, though it may not accurately represent how much it would actually cost to rebuild from scratch, and could leave you underinsured.
- Elemental estimating: This method is more intricate and takes into account many factors involved in repairing or replacing your home, to get a more accurate indication of how much you may want to insure the property for.
Some of the factors you may want to consider for elemental estimating include:
- What would it cost to rebuild your home today, not when the home was originally built
- The style and age of the building
- The materials used in the building and its finishes
- The structure of the building; how many levels and rooms, is there a verandah or deck?
- Whether there is a garage or carport
- Whether there is a pool
- The type of air-conditioning, solar power, or other modern conveniences in the building
- Whether the land is difficult to access, as this could increase the cost of construction
- The cost of hiring professionals such as an architect, engineer, surveyor, and lawyer
- Council approval plans, permits and fees
- Regional differences (building in Hobart may be cheaper than building in Sydney, for example)
- Your home’s risk of being affected by natural disasters such as bushfires, floods and cyclones. Your local council may provide hazard maps, which can give you a better understanding of your local area’s risks
- If your policy covers demolition, debris removal, levelling or landscaping
Another potential consideration is if your insurer will pay for temporary accommodation if your home is damaged and rendered uninhabitable. This could be important if a bushfire or other natural disaster means there's a shortage of available builders, which could in turn mean lengthy delays getting your home rebuilt.
What are the main types of home insurance?
There are three main types of home insurance available in Australia:
- Building insurance: Covers damage to the structure of your property only
- Contents insurance: Covers damage or loss of the possessions held inside your property
- Building and contents insurance: Combines cover for both your building’s structure and your possessions, possibly for a discount compared to taking out separate home insurance and contents insurance policies.
Each type of insurance could leave you at risk of underinsurance if you don’t have enough cover in the policy.
Total replacement vs sum insured
There are generally two types of building insurance policies:
Total replacement
Total replacement cover includes all the costs to rebuild your home to the standard it was prior to the event that led you to make a claim, minus any excess amount listed in your policy.
An insurer will often conduct its own assessment of the damage or loss that occurred to calculate the amount it will pay.
While you’re generally less likely to be underinsured with total replacement cover, fewer insurers offer this type of cover, and it can also be more expensive.
Sum insured
Sum insured cover is where you specify a maximum amount of money you would be covered for when you take out the policy, based on an estimate of how much you believe it would cost to rebuild your home to its current standard if it was completely destroyed by an insured event. This introduces the risk that you may be underinsured.
To help mitigate some of the underinsurance risk, some insurers offer a 'safeguard' or 'safety net', which may add up to 30% to your sum-insured amount in the event of a total loss.
How much home contents insurance do I need?
The amount of contents insurance you need will depend on what possessions you own and keep in your home. You can base the sum of your home contents insurance on how much it would cost to replace existing contents with new items. For example, your couch might be quite old and only sell for $100 online, but the replacement cost for a similar but new couch might be $1,000 or more.
How do you value your contents correctly?
Depending on the number of possessions you have, calculating their replacement value could be an easy task—or potentially a daunting one.
One strategy might be to make a list of all the possessions you want insured, going room by room through your house and noting down anything of importance that you would want to be covered. You can use the current purchase prices for many of these items as a guide. And if you’ve held onto the receipts from your purchases, you could also be guided by their original costs.
Some items you may think have little or no value, could now be worth more than you think. For example, that old vinyl collection may include some much sought-after—hence valuable—records.
Once you have this list, remember to update it regularly, especially when you purchase a new item you might want insured. You can then review your cover, and if necessary, increase the amount you're insured for.
Can an insurance calculator tell me how much cover I need?
Insurance calculators can be a helpful place to start when calculating the amount building or contents cover you may need, but it’s a good idea to use the result as a guide only.
Some calculators may use a simple cost-per-square-metre or a more complex elemental estimating approach to estimate rebuilding costs.
The more basic web calculators may be limited because they may apply an average figure to each home and its contents. The results may also vary greatly from calculator to calculator.
It’s a good idea to treat any insurance calculator as a very general estimate of your needs and not a detailed or personalised assessment.
Will the insured value of your home be adjusted for inflation?
Construction costs, including labour and materials, can rise over time due to inflation, but your home’s sum insured value may not. Some home insurance providers, like Allianz, will increase the sum insured value (if you’ve chosen this method) of your home automatically each year in line with inflation, but this is not true of every insurer.
It’s worth checking with your home insurance provider to see what their process is for inflation-proofing your policy. If your policy doesn’t automatically increase, you can update your sum insured value annually to help better reflect current rebuilding costs.
Similarly, if your insurer won’t automatically change the sum insured value of your contents insurance, including specified and portable contents, it may be worth checking and updating if required each year, especially if you own valuables that increase in value over time.
Why is underinsurance so common?
Underinsurance is when your policy will not fully cover you for the value of your home and contents, which means you would be out of pocket for additional repairs and replacement costs if you need to make a claim.
There are many reasons why underinsurance may be so common in Australia. The set-and-forget factor is one. It can be easy to fall into the trap of taking out home and contents insurance when you first buy your home and move in, and then forget about it.
For example, you may forget to update your contents policy when you get an expensive gift or make a major purchase that you keep at home, or forget to update your home building policy when any renovations increase the cost of rebuilding your home.
Another possible reason for underinsurance is that home insurance companies in Australia generally leave it to you to estimate how much it would cost to rebuild your home. This rebuilding cost is different to the price you paid for the property, and different to its current market value. Having to estimate these costs and the level of cover required for both home and contents could lead to you being underinsured.
If you’re still not sure what level of building insurance cover you need, you could always get an expert valuer to value your home. However, this could require paying a fee.
Why should I compare different home insurance policies?
It’s important to not only review your cover regularly to make sure it’s enough to suit your needs, but to compare it with others on the market. Your home will more than likely be your most valuable asset, so it’s important to consider the level of insurance you’ll need.
Keep in mind that the cheapest policy may not always provide the cover you require, so it’s a good idea to read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) of any product you’re considering and compare home insurance policies before making a decision. Some home insurance providers may offer introductory deals and discounts when you take out a new policy or for the use of home alarms and other security systems, which is also something worth considering.
