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What is underinsurance, and how to avoid it?

What is underinsurance, and how to avoid it?

If you are an Australian homeowner, your home insurance policy might not have adequate coverage to make good the damage to your home and possessions during an unforeseen event.

An assessment by MCG Quantity Surveyors found that many Australian homes could be under-insured by 66 per cent, amounting to hundreds of thousands of dollars. In 2017, the Victorian government published a report stating that only 46 per cent of Victorian households had enough insurance to recover from a disaster. It also revealed that 28 per cent of households were underinsured and 26 per cent had no insurance.

More recently, a survey by the Insurance Council of Australia (ICA) found 74 per cent of Australian renters did not have contents insurance. Furthermore, 80 per cent of the respondents worried that they might have a gap in insurance coverage for home and contents.

Is your house underinsured?

According to the Australian Securities and Investments Commission (ASIC), your home is underinsured if your insurance policy covers 90 per cent or less of the rebuilding costs. Such a gap in insurance cover means you’d potentially have to pay a significant amount from your pocket to rebuild your home and assets in case of an emergency or mishap. Such a situation could potentially lead to a financial burden that may have been easily avoided by purchasing the right cover in the first place.

What leads to underinsurance and how to avoid it?

Possessing proper insurance cover for your household and assets can help you manage risks from unforeseen events like natural calamities and other disasters. However, underinsurance is common in Australia, and it is often the result of a lack of awareness across several factors.

For example, an ABS report states that the average cost of building a house in Australia increased from $179,467 in 2003-04 to $313,775 in 2017-18. This hike of 74.8 per cent in the average construction cost in less than a decade means that the insurance cover purchased for your home a few years ago might not be enough to cover its present rebuilding costs. Similarly, the cost of replacing items in your home also changes over time as you replace old furniture and equipment with new things.

To avoid underinsurance, consider revisiting your home and contents policy every couple of years to check whether it reflects the present value of your home and belongings. If not, you may need to apply for a larger cover to plug the gap in coverage.

In some cases, high policy premiums can also discourage some people from taking adequate cover. Generally, a home and contents insurance policy can cost you upwards of $2,000, depending on where you live. Unfortunately, with the frequency of natural disasters on the increase, insurance costs have the potential to be driven up even further.

You may compare home and contents policies online to find a more affordable option with adequate cover for your assets. While comparing, keep in mind that different policies have different features, and the cheapest policy might not provide you with the cover you need. Therefore, make it a point to read the fine print, compare all features, and read the Product Disclosure Statement (PDS) for every policy before making a decision.

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