Four out of five Australian households are estimated to be underinsured by 10% or more against rebuilding costsi. But, having the right cover is essential to avoid being caught out in the event of loss or damage.
The average Australian household spent 5.6% of their weekly expenditure on insurance (excluding life insurance) in 2011 according to the Australian Bureau of Statisticsii. Yet despite spending on average $11.33 a week on home and contents insuranceii, there are high levels of underinsurancei.
When a policy does not fully cover the cost of replacing your home and contents you are underinsured. One reason that can cause this is if you inaccurately calculate the replacement cost of your home and contents. With the cost of building a new house having increased four-fold over the past 20 years, it is vital to calculate your rebuilding and replacement costs accuratelyiii.
Insurers use indexation rates to increase the sum insured to adjust for increased costs when you are offered your insurance renewal. Despite this, as noted by ASIC:
"The sum insured may have been sufficient to cover rebuilding costs when the policy was taken out. However, rebuilding costs may change at a greater rate than annual increases in the sum insured, resulting in the consumer becoming underinsured over time.iv"
This makes it important to check each renewal so that the sum insured is adequate. Building code changes that could impact significantly on the cost of rebuilding - for example, the addition of cyclone building codesv - and renovations are two factors to be aware of when checking the sum insured. It is also important to consider cover for the cost of demolition and the removal of debris related to the destroyed or damaged part of the building.
One way of calculating the replacement cost of your home and contents is by using online calculators that work out 'the sum insured'. The most reliable and thorough calculators ask many detailed questionsvi. Allianz offers a home building replacement cost calculator and a home contents replacement cost calculator on its website to help customers estimate the replacement cost of their home and contents.
With the family home being the primary asset for many Australians, it's vital for homeowners to know the precise replacement costvii. As construction costs have increased, particularly in the last 10 years, it's important to calculate the replacement costs accuratelyviii. There are two main methods for estimating the sum-insured cost (the amount it would cost to rebuild and replace your home and contents). The 'cost per square metre' approach is based on the house size and some very basic information, but can be very inaccurate in terms of actual replacement costi. More advisable is 'elemental estimating', which tends to be more closely aligned to the actual cost. It takes into account different elements of a building and calculates rebuilding costs using local wage and material pricesi.
Allianz's full home building replacement cost calculator asks questions about your building including the location, period of construction, size (area and floors), construction quality and materials used. Other features of the house such as bathrooms, kitchens, balconies, garages, security, heating, lighting and water systems are considered in terms of their number and size to provide more specific data to help estimate the replacement cost. The calculator is provided by Cordell, a company that specialises in project activity and building cost information in Australiaix. It is important to note that the Allianz calculator is an estimate based on averages. Your specific circumstances may be different: to determine the replacement cost of your building, you will need to consult an architect, a builder or a valuation expert.
Contents insurance covers the cost of replacing or repairing your possessionsx. With the average Australian household's contents worth $61,000, it's essential to have your possessions correctly valuedxi. When it comes to estimating the replacement cost of contents, online calculators can be used, however a better (although admittedly more labour and time intensive) method is to record how much it would cost to replace every item in your housexii. Bear in mind that many items can be overlooked due to their everyday nature including crockery, cutlery, bed linen, books, CDs, clothing and footwear - but these would still have to be replaced in an insured eventxiii. Taking clear pictures and retaining proofs of purchase (such as receipts) will also assist in the calculation of the true cost of your contents, should they need to be replacedx.
Allianz's home contents replacement cost calculator can help you estimate your contents' replacement cost. The initial estimate is based on the quantity and quality of your contents and the number of rooms, balconies, garages and sheds. The special items pricing area allows customers to put down the precise value of possessions they consider valuable to them such as jewellery which require specifying in their policy. Based on this information the calculator makes an estimate of your possession, for example, the number, quality and value of washing machines.
After the initial estimate, you can modify the assumed possessions list to make the estimate more accurate. The calculator is provided by Sum Insured, a company that specialises in the research and production of building contents informationxiv. It is important to note that the Allianz contents calculator provides an estimate based on averages. To determine the replacement costs of your specific contents you will need to consult a valuation expert or compile a detailed inventory of all your contents.
It's vital to calculate the replacement cost of your home and contents accurately so you don't end up with extra replacement costs if your home or contents are damaged or destroyed. Regularly adjusting the sum insured on your home insurance policy based on the accurate calculation of replacement costs will help you avoid underinsurance.