Not a year goes by without some part of Australia being devastated by a natural disaster. Bushfires, floods, storms and tropical cyclones are a part of our lives. And as we’ve witnessed in recent years, destructive weather patterns and events occur regularly throughout the year, often with little or no warning. This means that any time of the year is a good time to review your insurance cover to ensure your financial possessions are protected, as well as the security of you and your loved ones.
The pain of under-insuring
The images of families losing all of their possessions during widespread flooding, storms and bushfires over recent years should provide a constant reminder of how a lifetime of hard work can vanish in minutes. It is even worse when so many of these victims were either uninsured or under-insured.
Most people understand the consequences of being uninsured: you bear the total loss of whatever damage is suffered and property lost. On the other hand, being under-insured means that you have not insured your property for its full value, which is considered to be less than 90% of any rebuilding costs.
This may not be intentional. It’s easy to fall into this trap, particularly if you don’t review your policy in relation to the value of your home and possessions on a regular basis. How much has your property changed in value over the past three years?
This is how easy it can happen
You don’t have to lose your entire home to suffer the effects of under-insurance. Partial loss can place a challenging strain on your finances.
Take the example of Jake and Olivia whose home was valued at $500,000, but to save money on premiums they decided to insure it for only $375,000 – three-quarters of the value. An out-of-control truck ploughed through their front fence before coming to rest halfway through their master bedroom. Thankfully they were both at work and nobody was injured. Their home sustained $100,000 worth of damage but Jake was shocked when he learned that the insurance company would only cover three-quarters of the loss - just $75,000. They had to borrow the $25,000 shortfall.
If you look at it from the insurer’s perspective, when you insure for less than the real value, they are receiving less money in premiums, so they’re not likely to pay the full value in a claim.
Natural disasters and accidents are not fussy about who they affect so don’t let the next one be the catalyst to review your insurance coverage.
And while you’re doing this, make sure you have appropriate and adequate life insurance in place. You and your loved ones are far more valuable than your possessions. Now is the time to act. Give us a call.
ASIC’s MoneySmart website www.moneysmart.gov.au Risk of Underinsurance