It’s every homeowner’s worst nightmare: A natural disaster — such as flood or fire — that completely destroys their home and everything in it.

While still reeling from the shock, they contact their insurer to lodge a claim, only to get hit with a double blow: news their home is underinsured.

It’s a scarily common scenario in Australia, with literally millions of households said to be incorrectly calculating the value of their home and contents.

This article outlines some of the steps you can take to avoid becoming another statistic.

What is underinsurance

Underinsurance is not having enough insurance to cover the total cost of repairing or replacing your home and contents if they’re badly damaged or destroyed.

When you buy an insurance policy, it’s up to you to decide how much to insure your home and contents for — the ‘sum insured’.

If the amount is too low and you make a claim, you could be tens of thousands of dollars, or more, out of pocket.

It’s also important to consider all the possible risks that could cause damage to your home and contents.

For example, your insurer may offer flood cover as an optional extra; if you don’t take it out, your home won’t be covered for flood-related damage or loss.

Reasons for underinsurance

There are numerous reasons why Australian homeowners underinsure their most valuable asset. They include:

Market value vs replacement cost

People sometimes underinsure their home because they confuse a property’s market value with its replacement cost.

Market value is the estimated price your property — the dwelling and the land — would sell for today on the open real estate market.

Replacement cost is the estimated price to completely reconstruct your property's residential building and other structures if they were totally destroyed today, for example, by fire.

It’s important to appreciate the distinction — and to you insure your home for its replacement cost.

For example, a property in regional Australia may have a market value of $200,000 but the house could cost more to replace.

Conversely, a property in a capital city may have a market value of $1.85 million but the house could cost less to replace.

Calculate how much it would cost to replace your home

Extensions and renovations

Homeowners who increase their property’s value by adding an extension or renovating it can sometimes forget to increase the amount it’s insured for.

(You must tell us when any renovation work on your home starts and finishes, as it can affect your cover.)

New construction standards

Depending on how old your home is, the construction standards that applied when it was built may have changed.

If your home is destroyed, it may have to be rebuilt to a higher standard than it was originally constructed. 

These higher construction standards can significantly increase the cost of rebuilding your home. 

For example, if your home was built in a designated bushfire-prone area before 10 September 2009 and it’s destroyed by fire, it will have to be rebuilt to higher standard. Read more

Our home replacement cost calculator factors in the latest construction standards.

Accumulation of possessions

Humans, by nature, are acquisitive: We have a strong desire to acquire wealth and possessions.

In the course of owning your home, it’s likely you’ll end up with many more belongings than you started with.

For example, since first insuring your contents you may have bought new furniture or expensive jewellery.

Unless you re-calculate your contents insurance to take account of these additional items, it’s likely your belongings will be underinsured.

Deliberate underinsurance

There’s no denying it — it’s hard balancing a household budget in one of the world’s most expensive places to live.

Every saving helps, so some people might be tempted to understate the value of their home in order to lower their insurance premium.

But if your home is badly damaged or destroyed, the repair costs could be significantly greater than the value for which your home is insured.

You could end up regretting your “thrifty” decision for the rest of your life.

In comparison to their previous insurers' home and contents insurance premiums, our customers nationwide told us they saved an average of $### by switching to us.
Read more

Other reasons

Other reasons for underinsurance include:

Selecting a policy based on price rather than need
Your home’s replacement value should be your starting point — not the cost of cover. 

‘Home insurance is unaffordable’
While some people may think insurance is unaffordable, underinsurance can be financially crippling (having no insurance can be even worse). Compare our home insurance prices

‘It’s not worth insuring’
That’s for you to decide; the question is, could you afford to replace it by yourself?

‘It won’t happen to me’
Optimism can look like foolhardiness if the worst happens and you don’t have enough cover.

What happens if you underinsure your home?

If your home is totally destroyed, for example by fire, and you make a claim, your insurer will pay up to the amount your home is insured for — the ‘sum insured’.

If your home is underinsured, to cover the shortfall you might be forced to:

  • dip into your savings or sell any assets
  • increase your existing home loan
  • take out an additional mortgage.

Worse, if your lender has to claim on lender’s mortgage insurance to cover any outstanding debt, the mortgage insurer could try to recover the debt from you.

It could take you years to pay off this debt, which could lower your standard of living.

All because your home was underinsured!

How to avoid underinsuring your home

The following list shows some of the things you can do to reduce the risk of home underinsurance:

Use an online replacement-cost calculator

Calculating the cost to replace your home is complex. To make it easier, we’ve made available a replacement-cost calculator from leading estimator Cordell Information.

It can estimate how much it would cost to rebuild your home based on its style, size and construction materials. The estimate excludes the extra costs of rebuilding.

Get a professional property valuation

While the abovementioned calculator can give you an estimate on the cost of replacing your home, it’s only a guide.

For a more accurate rebuilding cost estimate, we recommend you consult a professional valuer, quantity surveyor or building contractor.

They’ll estimate the cost of constructing a similar building on the same site, including the extra costs of rebuilding.

Check what your cover includes

Read your insurer’s PDS to find out what’s included in your cover and whether there are any optional extras you should consider adding to your policy.

For example, Budget Direct Home Insurance covers 10 insured events.

These don’t include flood, which for an additional premium you can add to your policy (subject to our underwriting criteria).

Take out underinsurance protection

Many insurers offer their customers ways of minimising their risk of underinsurance.

For an additional premium, Budget Direct customers can add optional ‘Sum Insured Safeguard’ to their home insurance policy.

If your nominated sum insured is not enough to repair or replace your home, we'll increase it by up to 25% (e.g. from $400,000 to $500,000).

Review your cover

At least 14 days before your Budget Direct home and/or contents policy expires, we’ll send you a renewal notice.

This is a good opportunity to review your cover and make sure you’re happy with the sums insured.

We increase these sums automatically each year, to reflect rises in costs. Your premium will be adjusted accordingly.

You do not have to wait until renewal time to change your sum insured — you can do it at any time via your online account (subject to our acceptance).

For example, if you’ve recently renovated your home, you should consider increasing your sum insured sooner rather than later.

How to avoid underinsuring your contents

The following list shows some of the things you can do to reduce the risk of contents underinsurance:

Inventory your contents

Inventory your contents room by room — and work out how much it would cost to replace the existing contents with brand-new items.

You can download a household inventory checklist from the Insurance Council of Australia’s ‘Understand insurance’ website.

Use an online replacement cost calculator

Calculating the cost to replace your contents is complex. To make it easier, we’ve made available a replacement-cost calculator from leading estimator and Sum Insured.

Check what your cover includes

Read your insurer’s PDS to find out what’s included in your cover and whether there are any optional extras you should consider adding to your policy.

For example, Budget Direct Contents Insurance covers 10 insured events.

These don’t include accidental damage, which for an additional premium you can add to your policy.

If your contents are damaged beyond repair, we’ll replace them with new ones.

Be aware of cover limits

Content insurance policies typically have limits on the amount the insurer will pay to repair or replace certain items.

If you have an expensive item that exceeds our maximum claim limit, you may be able to insure it for more than the limit by specifying it, or listing it separately, on your policy.

Consider portable contents insurance

Budget Direct Contents Insurance covers personal items lost or damaged by an insured event while they’re inside your home.

If you want your valuables to be covered when you take them with you away from your home, you’ll need to add optional Personal Effects cover to your policy.

Review your cover

At least 14 days before your Budget Direct Contents Insurance policy expires, we’ll send you a renewal notice.

This is a good opportunity to review your cover and make sure you’re happy with the sum insured.

We increase the sum automatically each year, to reflect rises in costs. Your premium will be adjusted accordingly.

You do not have to wait until renewal time to change your sum insured — you can do it at any time via your online account (subject to our acceptance).

For example, if you’ve recently refurnished your home, you should consider increasing your sum insured sooner rather than later.

Extra rebuilding costs

Budget Direct will cover not only the replacement value of your home, but also the cost of:

  • debris removal, demolition and professional (e.g. architect, surveyor, engineer) and building-application fees (Home Insurance)
  • disposal of your damaged contents and storage of your undamaged ones (Contents Insurance).

We’ll pay up to 10% of your sum insured for these costs — in addition to your total sum insured.