Insurance Guide

The Risks of Underinsurance: Protecting Your Assets

Insurance is a financial safety net that provides us with peace of mind, knowing that we're covered in case of unexpected events. However, underinsuring, or having insufficient insurance cover, can be a risky proposition that leaves you vulnerable to financial hardship. In this article, we will explore what underinsurance means, the risks associated with it, and ways to ensure you have the right level of cover for your car, home, and contents.

What is underinsurance?

Underinsurance refers to purchasing insurance cover that is insufficient to cover the full extent of potential losses or liabilities. This can happen when you choose the minimum required level of cover or reduce your cover to save on insurance premiums.

What are the risks of underinsurance?

Financial vulnerability: The most significant risk of underinsuring is the financial vulnerability it creates. In the event of an accident or unexpected event, you may be left with significant out-of-pocket expenses to cover the costs that your insurance policy doesn't.

Property loss: Underinsuring your car, home or its contents can lead to substantial financial losses in case of disasters like fires, floods, or theft. You might not have enough cover to replace or repair your property.

What is an example of underinsurance?

Let's look at an example where underinsuring could have significant consequences

Imagine a homeowner, Sarah, who purchased her first home several years ago. At the time, she shopped around for home insurance and opted for a policy that met her budget but didn't fully consider the potential risks involved. Her home was insured for its estimated rebuild cost at the time, which was $300,000.

Several years after purchasing her home, a natural disaster destroyed her home. The total rebuild costs were estimated at $500,000. Sarah was relieved to have home insurance and quickly filed a claim.

However, Sarah soon realised that her policy only covered $380,000 of damages (the higher sum insured from the original due to annual inflationary increases insurers provide). As Sarah had chosen a lower sum insured initially, to save on her insurance premiums, the sum insured was too low and did not reflect the current estimated rebuild costs of her home. The ongoing inflation adjustments by her insurer was not enough to reflect the true rebuild costs, as the starting sum insured was too low. This has now resulted in a short fall in the rebuild costs of Sarah’s home.

As a result of underinsuring, Sarah had to come up with $120,000 out of her own pocket to cover the rebuild costs, putting her in a financial bind and causing significant stress. Had she opted for an adequate sum insured that covered the full rebuild cost of her home, she could have avoided this financial hardship and rebuilt her home without a significant financial burden.

This example illustrates how underinsuring can leave you vulnerable to unexpected financial expenses when you need your insurance the most. It's essential to review your homes sum insured at renewal each year to ensure your cover aligns with your homes estimated rebuild cost to avoid such unfortunate situations.

Ways to ensure you have an adequate level of cover

Evaluate your needs: Start by assessing your needs. Consider the value of your assets, your financial situation, and potential risks. This will help you determine the appropriate cover levels you might need.

Make sure your home is insured to an adequate level

Use our home rebuild calculator to get an estimate of the cost to rebuild your home. It's helpful to do this calculation when you're insuring your home for the first time and at each policy renewal.

Make sure you've insured your contents to the right level

With this calculator you can skip the household stocktake and filing through reciepts. Instead, answer a few questions to calculate an estimate of your belongings in minutes. It's that easy.

Regularly review your policies: 
Life changes, and so do your insurance needs. Regularly review your insurance policies to make sure they still meet your requirements and provide an accurate level of replacement or repair cover.

Consult with an insurance professional: An insurance broker or adviser can help you understand your options and tailor your policies to your specific needs. They can also help you find discounts or package deals that may save you money without compromising on cover.

Don't sacrifice cover for lower premiums: While saving money on insurance premiums is appealing, it's crucial not to compromise cover to achieve lower costs. A small reduction in premiums can result in significant financial risk in the long run.

Research and compare: Before purchasing insurance, do your research. Compare insurance quotes from different providers to find the best value for the cover you need. Online tools and comparison websites can be valuable resources.

Underinsuring is a financial gamble that can lead to significant losses. To protect your assets and financial wellbeing, it's crucial to have the right level of insurance cover for your car, home, and contents. Take the time to evaluate your needs, regularly review your policies, consult with professionals, and make informed decisions to ensure you have the cover you need without exposing yourself to unnecessary risks. Remember, insurance is an investment in your peace of mind and financial security.

Need a little help with your insurance?

If you're unsure about your insurance needs, we're here to help. Give us a call on 0800 267 263 and speak to one of our insurance specialists or book in a call at a time that suits you. Have an existing insurance adviser or broker? Find them here.

The information in this blog is of a general nature and does not constitute financial or other professional advice. Policy limits and exclusions apply - refer to the policy wording for full terms and conditions.