When is the last time you checked that you have enough home insurance to cover possible damage to your home? A home that is not insured for its full value represents a potential risk to the home owner. Home damage will only be covered in full if the sum insured is more or less equivalent to the actual value of your home. An underinsured home will result in a reduced payout in the event of a claim.
Banks normally insist on home insurance when issuing a mortgage bond against a property. Some insurance companies automatically increase the amount insured to match ever-changing property values. Some insurers will await an instruction by the owner to increase the home insurance from time to time.
Insuring your home at market value is not always enough. It is essential to insure for the full replacement value of the house and land. Not all homeowners are aware of this. If they are lucky it will not matter. But if there is damage to the home as a result of fire, flood or any other cause, a subsequent claim will be limited to insured amount.
Improving or extending a house results in a higher replacement value and the insurance should be increased accordingly.
When valuing a home for insurance purposes it is necessary consider building costs above market value. In a weak market the difference can be substantial.
The following example illustrates the effect of being underinsured.
The Jones’ house has a market value of $100,000. It was purchased five years ago for $60,000. The replacement value of the house is $120,000 because home prices have lagged behind escalating building costs. The value of the insurance has not changed over the last five years. A burst water mains causes damage valued at $6,000. An insurance inspector evaluates the damage and estimates the full value of the home. As the house is only insured for half of its replacement value, the claim payment will probably be reduced by 50%.
The Jones will have to find the additional $3,000 themselves.
Home insurance is usually taken out when first buying a home. Over the course of a few years, the value of the home may have increased. Home insurance should be increased to keep pace with the changing cost of home ownership. It is up to the owner to follow the market trends and to obtain periodic home valuations.
Over-insuring your house is a waste of money. Any claims will be limited by the actual value of the property. So it is best to ensure that the insurance cover is always up to date.