As an investor, it is important to understand your options when it comes to protecting your investment and its contents. To this end, I'd like to share with you the following piece provided by EBM Insurance Brokers, which appeared in the April 2012 issue of Century 21 Wentworth's Property Investor.
Underinsurance under the microscope
If your home was damaged or your possessions stolen, would the amount they are insured for completely cover your loss?
If you hesitated in answering, chances are you're caught in the underinsurance trap – a situation facing thousands of individuals and businesses who have neglected to keep their insurance policies up-to-date.
Underinsurance is becoming increasingly prevalent in Australia and around the world. It describes a situation where the amount an individual or business is covered for is less than the true replacement cost of their home, business or contents.
All too often it is in moments of tragedy – be it a house fire or burglary – when people make the discovery they are underinsured. By this time of course, it is far too late.
For many, underinsurance is a consequence of making simple "guesstimations" of the value of their home and contents – and guessing wrong. Failing to take into account the appreciation of assets is a prime example of how households can under-appreciate their possessions.
Even issues like currency fluctuations can play a part – if the Australian dollar falls the replacement cost of imported goods becomes much dearer.
Underinsurance can also affect the value of your most valuable possession – your home.
Construction costs have increased considerably in most states over the past five years so the replacement cost of the family home can be significantly more than when it was first built.
For example, in recent years the cost of building new homes has increased by five per cent in Queensland over a single year, and by 16 per cent in Western Australia. Similar increases have been reported throughout the rest of Australia.
EBM Insurance Brokers General Manager Sharon Fox-Slater said that these increases in construction costs, many of which are passed on to the consumer, can create a significant gap between sums insured and rebuilding costs.
"For home owners, establishing an insurance policy is something they can budget for and can give them a clear idea of what insurable events are covered and what are not," said Ms Fox-Slater.
"But should a home owner not adequately insure their property and something happens, that's a risk that they cannot escape. This applies even more so to landlords when insuring their rental properties. Many investors place greater importance on insuring their own home yet less on insuring their rental property.
"The impact of underinsuring (or not insuring) a rental property can be devastating when there continues to be a mortgage to pay, yet no rental income and lack of funds to rebuild," concluded Ms Fox-Slater.
For more information about EMB's range of landlord insurance products please visit www.rentcover.com.auor call 1800 661 662.
For this and other valuable stories regarding your investment, we invite you to read the April edition of Century 21 Wentworth's Property Investor.