Underinsurance - How much home insurance do you need?

Often due to personal circumstances, underinsurance is an all too common experience. 

In the following article, we explain what underinsurance is, how it can affect your insurance claim, how much insurance coverage you need and how you can avoid underinsurance.

Underinsurance occurs when there isn't enough to cover the total cost of repairing or replacing your home and contents if they're 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; this is known as the "sum insured". If you underestimate the insured amount and it is too low when you make a claim, you could be tens of thousands of dollars (or more) out of pocket.

According to the most recent 2023-2024 report from the Insurance Council of Australia (ICA), the long-term impacts of natural disasters (namely flooding) have led to what's known as the "protection gap". This gap is caused by two main issues:

• Lack of cover: When there is no insurance policy on the property, or a specific uninsured event occurs that is an exclusion to that policy.

• Underinsurance: When a policy exists, but the sum insured is not enough to cover the full cost of rebuilding or replacing damage or total loss.

The "protection gap" represents the potential loss or damage to properties (caused by extreme weather events) that also aren't covered by insurance.

And with an estimated 1.2 million properties at risk of flooding, it's safe to say the "protection gap" could impact many Australian households and business owners.[1]

If your property is underinsured, then you may not have enough to cover repair and replacement costs, increasing building costs, supplementary costs, temporary accommodation, debris removal and more.

Here are some more ways underinsurance can affect your claim payment:

• Risk management - Not insuring the full value means that you are also responsible for part of your property's risk.

• Total Loss Coverage - If your property is a total loss, you may not have enough cover to rebuild your home or replace its contents.

While undervaluing your home and belongings may seem like a smart way to lower your premium, it's actually a way to ensure you stay underinsured.

If your home is badly damaged or destroyed and the repair costs are significantly greater than the value it's insured for, you may have to bear the additional costs to maintain the lifestyle you've worked so hard for.

Attempting to make a small, short-term saving on your premium could end up costing you far more in the long run. If saving on premiums is the reason you choose to be underinsured, you should compare our Home Insurance prices when you switch insurers and see how much you might save.

Your home should be adequately insured to its current replacement value (the value of the building, not the land). That way, if your home suffers a total loss due to an insured event, you’ll be covered for the costs of replacing and/or rebuilding the home.

Your Home insurance replacement costs may vary according to:

• The style/era of your home
• The size of the home (including any split levels, number of rooms, and bathrooms)
• Any permanent features (such as solar power, pools, and sheds)
• Any extensions or renovations that have been done that would increase the replacement costs (you’re also required to tell us as any renovation work starts or finishes, as it might affect your cover)
• The slope of your property
• Other variables and aspects of your home

To avoid undervaluing the belongings inside your home, you should consider:

• Your household and personal items
• Above-ground swimming pools/spas
• Fixtures and furnishings (like carpet and blinds)
• Household electrical appliances
• Any portable contents you would like to insure
• Paintings, works of art, and sculptures

Instead of guessing how much your home is worth, you can use an insurance calculator.

Our two replacement cost calculators allow you to either get the estimated cost of replacing your home or estimate the value of your belongings. However, for a more accurate estimate of rebuilding costs, it’s highly recommended you consult a professional valuer or licensed building contractor.

Replacement Cost Calculators

When you purchase an insurance policy (directly from your insurer or an insurance broker), selecting a sum insured to cover the current full replacement cost of your home and belongings will avoid being underinsured.

Any renovations, improvements or additions to your home might increase the replacement value. Not updating your policy limit is an easy way for your sum insured to fall behind the home's replacement value.

It's important to keep your insured value as consistent as possible with the home's actual replacement value.

While online calculators can help you estimate your home's replacement value, nothing can compare to having an expert inspect your property first-hand.

If you don’t want to use an online calculator, you can consult a professional valuer, quantity surveyor, or building contractor who is familiar with the latest building codes and regulations.

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

Sometimes there are unexpected costs that you can’t plan for, such as increased costs of labour and materials after floods or bushfires. Many insurers offer their customers ways of minimising this risk of underinsurance. 

For example, Budget Direct customers can add optional ‘Sum Insured Safeguard' cover to their home insurance policy for an additional premium. If your nominated sum insured is not enough to repair or replace your home, we'll increase it up to 25% (for example, from $400,000 to $500,000).

No matter whether you’re a property owner or renter, insuring your home and/or contents for the right amount is very important.

With Budget Direct, you can estimate the replacement value of your property and find the right Home and Contents Insurance,  Home Insurance or Contents Insurance policy.