Insurance expert Brian Gilmour explains why having the right sum insured is so important
No one likes to think that the worst might happen, but if the past few years have taught New Zealanders anything, it’s that we aren’t immune to tragedy. Your home is probably the biggest asset you will ever own – so in the event of a natural disaster or an emergency, would your insurance pay-out let you rebuild?
Research shows that up to 85% of New Zealanders may experience an insurance shortfall if they needed to rebuild as a result of major damage or destruction. In dollar terms, this shortfall could be around the $40,000 mark.
Brian Gilmour, a specialist in insurance for people over 50, says the trick is in the sum insured.
He explains, “When taking out a home insurance policy, most providers require that you set the ‘sum insured’ – the total amount you’ll receive if your home requires repair or a rebuild. The premium you pay is a direct reflection of the sum insured.”
Here Brian takes us through the sum insured balance, what to look out for, and how you calculate your sum insured confidently and correctly.
What is sum insured?
Sum insured is the maximum amount your home insurance provider will pay you if your house is damaged beyond repair. Homeowners need to set their own sum insured when taking out a new policy. If an amount isn’t supplied, by default one will be set for you by your insurance provider.
As Brian explains, getting the figure right is important.
“If you set your sum insured too low, or by default, you run the risk of not having adequate cover should the worst happen. This means you’d have to fork out the difference. If the sum insured is too high, you’ll end up paying for cover you don’t need.”
Your sum insured amount should be set at what it would cost for you to completely rebuild your home – including demolition and removal.
“That means you can’t base your sum insured on what you originally paid for your house, how much it cost to build, what it’s worth today, its rateable value or the land value,” says Brian.
Don’t get caught out
Like all insurance, your sum insured needs to be accurate – and updated regularly. Brian says the cost to rebuild will change every year due to inflation and the availability of materials and labour. Certain features like pools, driveways and retaining walls will impact on the amount, as will renovations.
His advice? Don’t set it and forget it.
“Remember to review your sum insured annually and adjust accordingly – especially if you’ve recently made alterations,” he says. “On the flip side, don’t tempt fate and skip increasing your sum insured to save money on premiums.”
The rateable value of your home and land means nothing when it comes to your insurance premiums. Rateable values are only an estimate of the market value – whereas sum insured needs to cover what it would cost to rebuild.
Brian says that no matter where you rebuild your home in New Zealand, it’s likely to cost a similar amount:
“But what will change is the value of land. Auckland land prices are astronomical compared to a similar piece of land in Gore.”
For this reason, he strongly recommends against using the rateable valuation of your property as your sum insured – it’s highly likely you’ll end up paying for too much or too little cover.
Getting the right calculation
Google ‘sum insured calculators’ and you’ll find multiple online tools available from insurance providers to help you calculate sum insured. While some of these calculators are good, Brian says there are several things they don’t take into consideration:
- Unique design, construction or location
- Any special features
- Home built on steep slopes
- Large or expensive homes
- Additional rebuild costs like removal costs or building consents
The best thing you can do is seek professional help – Brian says his virtual door is always open!
Turn to the expert
Every home is different, and each homeowner’s circumstances are unique. Getting expert advice will ensure all aspects of your home are included for an accurate sum insured.
Get in touch with Brian today – and get on top of your sum insured before it’s too late.