Most people know that the more items you insure, the higher your premium, so they might leave some things off the list when they apply. But if you’re underinsured and you lose everything, you’ll realize your choice wasn’t a great one.
Here’s how it works. Insurers pay out what is called the “average” – an insurance principle that has given many policyholders headaches. In simple terms, if you underinsure, you become your own insurer for the balance of the losses not covered.
When you have a claim for items lost, whether it’s because of fire or theft, an insurance assessor will do a full inventory of all the remaining/surviving items in the house and then add the value of the lost/claimed/settled amount to the value of the remaining items. This is known as the ‘actual replacement value at risk’. The ‘total sum insured’ represents the full replacement value of all of the items in the house and not just high-risk or expensive items such as TVs, DVDs, and computers. If you underinsure you will not be compensated for the full value of the items lost.
Sometimes people forget to adjust their policies as they acquire new items or improve their homes. Remember that if they’re not added, they’re not insured, so review your policy often. Also, remember to upgrade the value of your homeowner’s insurance so that the buildings themselves are adequately covered.
The chance of your house burning down is quite slim but if it happens, it will devastate your finances. And if you have a home loan, you’ll still be required to pay it off even if the house no longer exists – very few people can afford that.
Insurers know that insurance is a grudge purchase, but in the event of some or other disaster striking, it’s best to have some sort of backup – and that’s when your insurance provider will suddenly become your best friend.
