Contents insurance covers items in your home. But what about items that you take out of your home, such as your sports equipment or portable electronics? Learn about how Portable Items Cover can help protect your valuables.
Property
Understanding sum insured
Factors to consider
Avoiding underinsurance
What does sum insured mean?
Understanding the meaning of sum insured will help ensure you have the right level of cover for your home and possessions.
When choosing and buying home insurance, you will come across the term 'sum insured', which is an estimate of how much it would cost to repair or replace your home and/or contents after an insured event.
It's important you have sufficient coverage to protect yourself against financial loss due to unforeseen events, such as fire, theft or storm. Without an adequate sum insured, you might face substantial out-of-pocket expenses in such events.
This guide to sum insured is designed to help you select the right amount of coverage for your property and contents.
Sum insured: your FAQs answered
Understanding sum insured
Sum insured is the amount agreed upon by you, the policyholder, and the insurer at the time of purchasing the home insurance policy.
For example, the Buildings sum insured is the amount of insurance you choose to cover your home, while the Contents sum insured is the amount of insurance you choose to cover your contents.
While the sum insured is generally the maximum amount an insurance company will pay you for the replacement of your property and/or contents, after an insured event occurs there are some benefits that may be paid for on top of that amount.
It's important to read your policy documents, such as this Product Disclosure Statement if you have RACV Home Insurance, for clarification.
How sum insured is calculated
To calculate the sum insured, you must evaluate the value of the property and/or assets being insured and include GST.
For home insurance, this typically includes the cost to completely rebuild your home, including factors such as the size, materials, and location.
For contents insurance, this means the cost to repair or replace things you keep inside your home, including furniture, rugs, fridges, washing machines and TVs.
If you need help, to obtain an estimate, you can use the RACV building calculator or contents calculator.^
Why knowing your sum insured is important
It's important to take the time to estimate the sum insured. Underinsuring can leave you financially vulnerable, while overinsuring may result in unnecessarily high premiums. Seeking professional advice or using online calculators can assist in providing a more accurate estimate.
When the sum insured is inadequate, you could suffer significant financial loss if your home is destroyed. For example, if your home costs $600,000 to rebuild after being destroyed in a fire but your home insurance policy includes a sum insured of $500,000, you could be $100,000 out of pocket.
When calculating the sum insured, consider your property's size and any unique features that might affect the cost.
Common misconceptions about home insurance
There are some common misconceptions about sum insured when it comes to home insurance. Some people confuse it with the market value of the property, which includes land value; however, it refers to the cost to rebuild or repair the structure of your home, as well as other buildings on your property (such as a shed or garage).
There is also confusion around how to factor in inflation, and future costs of housing materials and labour. You should check the product disclosure statement of your home insurance policy to find out if sum insured automatically adjusts for inflation.
If you have RACV Home and Contents Insurance, the product disclosure statement states that each year your policy renews, there is an automatic increase in your buildings sum insured and general contents sum insured to account for inflationary trends.
Factors to consider
Several factors need to be considered when determining the appropriate sum insured for your home and contents.
Firstly, you must assess the replacement cost of your property, including the main structure and any additional structures like garages or sheds. Consider the materials used, the building's size, and any unique features that might affect the cost. For example, do you have solar power or a solar battery?
For your personal belongings, you need to calculate the cost of replacing all your furniture, appliances, electronics, and other possessions. Don't forget high-value items such as jewellery or artwork.
Avoiding underinsurance
It's crucial to avoid underinsurance, which occurs when the sum insured is less than the actual replacement value. In such cases, you may receive only a partial payout, leaving you to cover the remaining costs yourself. To prevent this, regularly review and update your sum insured to reflect any changes in your property or the value of your belongings.
The value of your belongings may change as you progress through different life stages.
When and why to review your sum insured
Life changes, and does the value of your assets. Failing to review your sum insured could result in being underinsured or overpaying for coverage you don't need.
So, when should you review your sum insured? It's a good idea to do so whenever you make significant changes to your property, such as renovations, or if you purchase or sell valuable items. Additionally, it's recommended to review your sum insured annually to account for inflation and any changes in building and labour costs.
How to adjust your sum insured
Adjusting your sum insured is a straightforward process. Start by taking an inventory of your assets, including their values. You can use online tools or consult with a professional valuer to determine accurate replacement costs. Once you have this information, you can contact your insurance provider to update your sum insured accordingly.
More: How to make a home contents inventory for insurance
Impact of changes on your premium
Keep in mind that adjusting your sum insured can have an impact on your premium. See the Product Disclosure Statement for more details. It is crucial to regularly review and adjust your sum insured to help cover your assets in an insured event.
The information provided is general advice only. Before making any decisions please consider your own circumstances and the Product Disclosure Statement and Target Market Determinations. For copies, visit racv.com.au. As distributor, RACV Insurance Services Pty Ltd AFS Licence No. 230039 receives commission for each policy sold or renewed. Product(s) issued by Insurance Manufacturers of Australia Pty Ltd ABN 93 004 208 084 AFS Licence No. 227678.
^ The RACV Home Buildings and Home Contents Calculators provide an indication of rebuilding or replacement costs only and in no way guarantee the amount RACV Insurance may agree to insure your home or contents for. It is your responsibility to check that this amount is enough to cover the rebuilding costs of your home or replacement costs of your home's contents at today's prices. Before you decide whether to buy or continue to hold RACV Home Insurance, you should calculate the actual replacement value of your home and contents and consider the information in the Product Disclosure Statement.
