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Insurance matters - Are you only insuring half your home?

07 Mar 2022

The whole point of insurance is to protect the things we value most. For many of us, outside of whānau and friends, that means our homes. Our homes not only provide us with a place to live, they are also central to our financial stability today, our ability to live well in retirement and pass on a legacy in later years. That’s why we insure them. But when did you last check how much yours is insured for?

When it comes to a total loss, say if your home was burnt down or wrecked in an earthquake, would you have enough insurance cover to fund a rebuild?

There are two ways to achieve this. The first through having a replacement policy. Here, the insurer takes the risk of meeting all costs associated with rebuilding your home to the same standard it was before it was lost. This is generally available only for fire and floods, but not for earthquake damage. Don’t assume you have this as not all insurers offer it.

The second type is similar to how many of us insure our cars for an agreed value. On your home policy it’s known as the sum insured.  Most insurers moved to this for home insurance following the multi-billion-dollar cost of meeting claims arising from the Christchurch and Kaikoura earthquakes. The reason for this is that the global reinsurance companies (who insurers insure themselves with) want to be clear exactly how much they may be in for in the event of another major disaster.

Your sum insured is the maximum amount your insurer will pay for damage to your home whether they manage a rebuild for you or offer you a cash settlement.

So why do I ask if you are only insuring half your home? Quite simply, because prices rise around us and most of us don’t typically dive into the detail of our insurance policies at renewal time to ensure our cover is up to date. Let me give you a real example.

One of the team at ICNZ insured his home for $581,000 some years ago, an amount he didn’t review or ask to increase. Two things happened to make him think again. The first was seeing an extraordinary rise of 16% reported by Stats NZ Tatauranga Aotearoa in the price of new dwelling construction reported in January.   

The second was to use the Cordell Sum Sure Calculator. This easy to find online tool helps to estimate the cost of rebuilding your home. The result from using it, $876,000, was a shock. Effectively, he needed to increase his sum insured by half as much again to be properly covered. This is easy to do, and because there are many more elements than just the total loss risk that make up all our premiums, increasing this did not make his total premium go up by half as much again. In fact, buying 50% more cover, only cost 12% more. How much it might cost you will depend upon the gap you need to close, other risks and who you’re insured with. It always pays to shop around.  

Insurance is indeed there to protect the things you value most. In order for it to do so, you have to make sure they are properly valued. In this case that means, not reports of house prices or what you paid when you bought, but what it would cost to rebuild. Don’t set and forget but keep on top of it and check in with your insurer and use tools like the Cordell Calculator.