There is nothing worse than having no insurance if you lose your home except paying premiums for years only to find out that when you need it you don’t have the cover you expected.
There are three types of cover you need to consider for your homeowner’s insurance; building, contents and legal liability.
Building insurance usually covers your residential building, fixtures, fittings and domestic outbuildings such as a shed or garage and fences. Contents cover includes your furniture, furnishings, valuables, personal possessions and unfixed household goods. If someone is killed or injured at your home or their property is damaged whilst on your premises, liability insurance will cover your legal liability to pay compensation.
Depending on where you live in the world you may need to take out separate cover for each or you may be able to combine covers in one policy. Wherever you live, insurance companies will not pay more than the sum insured so you need to ensure you have enough cover should the worst happen.
How much is enough?
Simply using the purchase price of your home or contents to set the insurance value can see you dramatically underinsured but how do you work out what is the amount of cover you need?
Building insurance
You should insure your home for what it costs to rebuild using new materials. Unless you recently built your home this can be difficult to work out. For a fee you can use the services of a builder or professional valuer to obtain an expert opinion.
Don’t use a loan valuation as these are based on market value which may have no relevance to rebuilding cost. Loan valuations also include the value of your land which should not be included in building insurance.
If you want to estimate the cost to replace your home yourself, you can compare your home to builders advertised prices for the same size and construction type. Take care when doing this to take into account any special requirement for building on your site.
If your home site is on sloping land there will be an additional cost. Don’t forget to add the cost of clearing debris from the land. The damaged parts of your house or even the entire house itself may need to be removed before repair or rebuilding can begin.
Building insurance also covers replacing sheds, fences, driveways, patios, pergolas and other fixtures. Fixtures include installed appliances such as your oven and cooktop. Take a walk around your house and yard and note down everything that cannot be moved, then include it in your calculation of the sum you need to insure.
Contents insurance
When you calculate your requirements for contents insurance consider how much it would cost to replace everything if your home burnt down. Always use current prices to calculate your sum insured, not the depreciated value. This particularly applies to items that are old, were purchased second-hand or are no longer available.
The cost to replace old items with new is not always higher. The price of technology for example is constantly changing and the original purchase price might not be accurate. If you purchased a video camera seven years ago for $2000 the same camera may only cost $500 today. If so, you only need to insure the camera for $500.
To get a total view of the sum required to be insured take a walk around your house and note what is in every room, passageway, garage and outdoor living area. Then estimate the cost to replace those items with a new equivalent. Don’t forget items such as carpets and curtains that are not covered under building insurance as fixtures.
You may need to take out additional cover for valuable personal items such as expensive jewellery or works of art. Read the policy disclosure documents carefully it is common for claim limits for general cover to be imposed on these items.
Some insurance policies will also allow you to add portability to your cover. If you have a digital camera that you take everywhere with you portability will cover theft of the item while you are away from your home.
Liability insurance
It is difficult to assess what level of liability insurance you will require as the maximum amount awarded by the courts varies depending on the circumstances and often how good an attorney is used by the claimant.
Most insurance companies will provide a standard level of cover based on location and recent court rulings. Many include this as standard with building cover.
It is important to have adequate homeowner’s insurance. Most events that result in insurance claims are traumatic enough without the additional stress of finding out you don’t have enough cover. Even if you never need to make a claim, knowing you have adequate cover will give you peace of mind.