Underinsurance – what is it and why is it a problem?
More than four out of five of Australian’s are underinsured but what does this mean? It means, quite simply, that they do not have enough insurance to cover the things they own. In other words, they are gambling with their homes and other valuable assets. What is perhaps even more worrying is that almost a quarter of home owners and renters have no insurance at all!
In a survey conducted by Quantum research it was found that 83 per cent of people would be worse off in the event of a crisis because they didn’t carry enough insurance. Most people assume, correctly, that this means if they lost everything due to a house fire, flood, or some other equally devastating event that they wouldn’t receive enough back from their insurance to resume the standard of living they had become accustomed to. What they miss, however, is that under insurance can affect other claims as well, not just total losses.
Some people take out insurance to cover an amount that is less than what they own to game the system. They are gambling on the fact that they won’t suffer a complete loss and therefore will never have to claim the full amount of their cover. By reducing the amount covered they pay a lower premium but they may be missing out on more than they bargained for.
“It does not pay to under insure”
Many insurance policies contain a claim known in the industry as averaging. This enables the insurer to reduce the amount they pay out if they suspect that the policy holder has not taken out enough cover.
For instance, if they suspect a person has $100,000 worth of assets but only takes out $75,000 worth of cover they may legally reduce the payout by 25%. That is, you may have a claim of $30,000 due to a robbery but only receive $22,500 in your payout because you were under insured.
It does not pay to under insure whether on purpose or by accident so how can you avoid this?
For a start, around 40 per cent of people rely on their own estimates of what they own. Think about the simple things like your clothes, kitchenware and garden tools. This is often overlooked when estimating contents values in favour of the big ticket items like TVs, computers, and other high value items. So don’t guess the value, take the time to work it out properly.
Pay attention to your insurance policies. One quarter of policy holders don’t understand what is covered by their policy. Two fifths of people do not even read their policy! This may lead to them being caught out when making a claim. Most policies have exclusions that may reduce cover when outside of the house for portable items or place limitations on things like jewellery. Check what your policy covers and add those things that may be excluded.
Update your policy on a regular basis. Around 39 per cent of policy holders have not updated their cover since they took it out or when they buy new assets. Check your policy when it is time to renew it and think about the things you’ve bought since the last time your renewed. You may be surprised at how your worth has increased over the period.
“It’s like having insurance for your insurance”
Keeping a good home inventory can assist you to sidestep the problems of underinsurance by giving you a good estimate of the value of your belongings. WIth lockr you can simplify the process of keeping track of your things. We spend hundreds of dollars on taking out insurance but don’t think about doing everything we can to make sure our policy is there for us when we need it. With lockr you can avoid any hassles you might otherwise have with your insurance should it come time to lodge a claim. It’s like having insurance for your insurance.
Don’t forget to check out our other insurance tips.