How Much Cover Do I Need?

Buying a house will probably be the most expensive single purchase you'll ever make. It's absolutely essential to make sure that this investment is adequately insured, and in fact, most mortgage lenders will make this a requirement.

In order to pay out a claim in the event of a total loss, most insurance companies require homeowners to insure at least 80% of the actual value of their home (excluding the value of the land). If a policyholder is underinsured, the company may only pay out a proportion of the claim. For example, if a house is worth $200k, then the policyholder must have at least $160k of insurance (80%). If they insured their house for just $120k (60%), then the insurance company may only provide 60% of the loss - so a claim for $10,000 may result in payment of only $6,000.

It is your responsibility to make sure that you have the right level of cover, to ensure that any future claim payments are not reduced due to under insurance. You should review this level of cover regularly, and inform your insurance company if you make improvements your home, such as building an extension.

Although most companies require an insurance value of at least 80% of the home's value, experts recommend that you insure 100% of the value of your home and contents, offsetting the increase in cost by raising the deductible amount. For example, instead of insuring a $200,000 home for $160,000 worth of coverage with a $200 deductible, consider insuring the home for $200,000 with a $1,000 deductible. A $1,000 loss should be more bearable than a $40,000 out-of-pocket loss.

To gauge the amount of cover you'll need, it's a good idea to bring in a professional to determine the value of your home. Don't forget to allow an appropriate amount for walls, fences, gates, patios, driveways or swimming pools, and for any garages or outbuildings.

You will also need to inventory the contents of your property, as if the worst happens, it can often be difficult to reconstruct your home's contents by memory. A good idea is to videotape the contents of the house or apartment as a record of what it contains. You may also want to get certified appraisals for items of high value.

Many homeowners' policies exclude certain possessions from coverage, such as expensive jewellery or equipment. You will need to take note of these exclusions or limitations of cover, and purchase riders (or another plan) to insure any of your belongings that aren't covered.

It's also worth making sure that your policy uses guaranteed replacement cost coverage, which means that the insurance company must pay the cost to replace the item or property as if it were new, ignoring any depreciation that occurred before the damage.

To allow for inflation and increasing property prices, you must ensure that your level of cover is kept up to date. It is always wise to fully review your policy every 2 or 3 years to ensure that the cover remains adequate for your needs.