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Tips on how to avoid Under Insurance

In 2005 the Australian Securities and Investments Commission (ASIC) estimated that 70% of Australian homes were underinsured. Should the worst happen and an underinsured asset be lost, there is no capacity under the insurance policy to replace the asset.

If your home is insured for $200,000 and is destroyed by fire (where that is covered by the policy) but the rebuilding and replacement costs equate to $350,000, you may need to find at least an additional $150,000 to replace the property, depending on the terms of the policy. Your personal belongings are also susceptible to being under-insured. If fire destroys the contents of your house you may find, unless you have been diligent in calculating your coverage needs, that the value you have nominated for your contents in your policy falls short of being able to replace all your goods.

Who is responsible for choosing the level of Insurance cover?
Only the owner of a building or its contents can determine the amount of insurance they wish to take out over their assets. Some factors that can contribute to underinsurance are:

  • A gradual accumulation of possessions – the number and value of things owned can grow significantly over time and must be taken into consideration when calculating the value. Add up the replacement cost of your possessions room by room on a regular basis.
  • Not accounting for upgraded assets – over time household items and belongings tend to be replaced by items which are more expensive and of better quality. After renovations or upgrades of household items consider whether the level of insurance should also be increased.
  • Financial prioritisation – Some people choose a premium they want to pay and live with this and the level of cover provided from that point on. This is not the same as working out the value of assets and insuring at that level.
  • Increased building costs – Building regulations and bylaws may have changed since your original building was constructed. This can add further cost to the rebuilding should it be required.

There are several policy types on the Australian market, to suit a variety of insurance needs in the community . For example, Sum-Insured Policies, Sum-Insured Policies plus Margin and Total Replacement Policies.

There are five things to consider when insuring:

1. Understand your policy and know if it is right for you
2. Ensure you review the replacement value of property and contents each year before renewing your policy
3. Make a list of the contents of each room and replacement value. Adjust your cover accordingly and take careful note of any policy terms concerning high value items and exclusions.
4. Check rebuilding costs for your property using web calculators or advice from a local builder
5. Check your insurance to make sure the value of any improvements or renovations has been included since your policy was taken out.

If you are at all uncertain about what is the best and correct policy for your needs, speak to an insurance broker.


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