I’m just gonna come out and say it – Insurance, let alone underinsurance, is not a sexy subject.
When we’re younger, we couldn’t care less about insurance, as it’s something our parents take care of on our behalf. As we grow, we’re too busy having fun to care about the prospect of something bad befalling us. And as we approach our 30’s, It’s usually only when something unexpected crops up that we ever even consider insurance, and by this time, it can be too late.
Does this sound familiar? It’s probably the main reason why Australia is one of the most underinsured nations in the developed world. Let that sink in for a moment.
This level of underinsurance can be anything from inadequate levels of life insurance and income protection, to grossly undervalued assets, meaning that in the event of a claim there would be a financial loss on the part of the underinsured.
What is Underinsurance?
You are considered to be underinsured if your insurance covers less than 90% of the total costs in the event of a loss. (ASIC definition on MoneySmart.gov.au)
For example, you may have renter’s contents insurance for a jewellery collection, insured to the value of $1,000. Since you last updated your policy, your jewellery collection has grown and is now worth $1,500, meaning that you’re only insured for 66% of the worth of your collection.
Why would I be underinsured?
There can be a number of reasons, really, depending on your age and lifestyle.
- You’ve chosen to insure your asset to an agreed value rather than the full replacement cost
- You’ve previously been covered by your parent’s insurance and have recently moved out on your own, and have secured the best insurance you could afford
- Your lifestyle has changed and/or you’ve acquired a new set of circumstances or possessions without considering the need for updating your insurance
- You’ve realised you need to review your insurance cover, but the perceived effort of estimating the value of your required cover has put you off
Why does underinsurance matter?
One of the main risks of underinsurance is that in the event that you do need to make a claim, your insurer may choose to either void your policy (and refund all premiums previously paid) or choose to provide you with a reduced pay out.
How can I avoid being underinsured?
Generally, before providing you with a quote, your insurer will want to know the full replacement cost of the asset you’re looking to insure.
Your insurer will often rely on your estimate for replacing your asset, instead of carrying out a site visit, or getting an independent valuation done.
DO NOT underestimate the full cost of replacing your asset, and do not rely on market value when estimating a replacement value. You should also consider any costs associated with replacement, and include this in your insured amount.