Home insurance 101: What happens if your home is underinsured?

It’s estimated that as many as 4 in 5* Australian homes are underinsured leaving many Aussies vulnerable to high repair bills when disaster strikes.

Underinsurance is when homeowners have a home and contents insurance policy, but don’t have an adequate level of cover to fund repairs if their home is damaged. According to Mozo Data Manager Peter Marshall, being underinsured can deliver a big blow to Aussies’ wallets, right when they need help the most.

“Underinsurance is dangerous because many homeowners probably don’t even know that they are underinsured, then when it comes time to make a claim, they find themselves out of pocket,” said Marshall.

For example, if the cost to rebuild your home is $400,000 but you’re insured for just $300,000, then you’re only insured for 75% of its true value. The extra $100,000 will have to come out of your pocket.

The exception is if your home insurance policy has underinsurance cover, which is a kind of safety net that covers you for up to 30% more than the agreed value of rebuilding, or if you pick a total replacement policy, which lowers the risk of underinsurance because the insurer agrees to pay the cost to rebuild your home to the same standard.

“Owning a property in itself is a huge investment, not to mention everything that comes with it, like appliances, furnishings and all your belongings. Leaving it unprotected or only partially protected is a big financial risk,” said Marshall.

How to work out what home insurance cover you need

So why is underinsurance so common? For one thing, it can be tricky for regular Aussies to work out how much it would really cost to rebuild their home. Mozo’s property expert Steve Jovcevski weighed in on how much a property should be insured for.

“You’ve got to think about it in terms of, if my house was destroyed and I had to rebuild, how much would it cost me to recreate my home? This can be a really difficult thing for regular people with no construction experience to work out - even harder than establishing the current value of a property,” he said.

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Another risk factor is if you haven’t updated your home insurance policy in a while. You may have done renovations that increased the value of your home - so the insurance you had three years ago may no longer be appropriate.

“It’s important not to simply put down the price you paid for the property, because that includes the cost of the land and market factors like how popular your suburb is. Instead your looking at the value of the actual building, so you need to factor in things like renovations, and the cost of labour and materials. That means updating your policy fairly regularly to make sure you’ve still got enough cover,” said Jovcevski.

One way to avoid being underinsured without breaking the bank is to find a policy that balances the cover you need with a price tag you can afford. To get started, check out the winners of the recent Mozo Experts Choice Home Insurance Awards, or head over to our home insurance comparison to check out some of today’s hot deals.

*Source: AMP