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Why is my home insurance sum insured so high?

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Have you recently researched a new home insurance quote from an insurer and 'fallen off your chair' at the suggested sum insured for your property? You are not alone. The sum insured subject can be a little confusing and daunting. Here are a few tips to get you on the right track.

Real estate value vs. insurance sum insured value

You could be forgiven for thinking that your home insurance sum insured would be the value of the property less the value of the land. Unfortunately, this is not the case. The real estate value of your property has nothing to do with the insurance value of your property, and these two values are actually quite separate. It is not unusual for your home insurance sum insured to be higher than the property's real estate value.

Your insurance sum insured should reflect the complete rebuilding of your property - at today's costs, should something catastrophic occur that results in the complete loss of the building/s. If your sum insured is not high enough to cover this, you may find that you will need to contribute financially to the cost of rebuilding your property. This can be a financial nightmare if you already have a mortgage.

How are home sums insured derived?

It's a bit complicated, but the equation is usually based on a number of factors, including (but not limited to) a per square-meter cost of the building size based on:

Location (remote, regional, and capital city areas can vary greatly in building costs and the availability of local trades)
Construction materials and current building codes. These can often be different in disaster-prone areas.
'Removal of Debris' costs which is the site preparation and clean up of the old damaged building before a new one can be built. If your Home is older this could actually be more than a newer home.
Limitations on-site, such as limited site access or the additional difficulty and cost of building on a sloped site,
Plus fees and costs associated with a new build.

Some Insurers expect that your sum insured take into account the re-homing accommodation costs of the occupants (and pets) for the period of the rebuild and potential storage costs of undamaged furniture and or personal effects etc. This is likely to be as long as 12 months in many cases.

If this all sounds too complicated, a sum insured calculator is a great way to establish a realistic building sum insured for your property. Here's the link to get you started.

How often should you revise your sum insured?

In the current economic environment, it is advisable to re-check your building sum insured yearly. Lenders require homeowners to insure their property when taking out a mortgage, however, most Lender's requirements are only for the loan amount - this may not reflect the actual insurance replacement cost of the property. With building costs rising 12% in the past 12 months, and 8% in the year before, a 20% increase on a $500,000 sum insured over 2 years can be a significant shortfall if left unchecked.

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General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.

All information above has been provided by the author.

Reef Insurance Brokers Cairns and Tablelands, ABN 48646410335, AFSL 327131