Why is it important to choose the right sum insured?
How does your policy’s excess affect the sum insured?
An insurance policy excess is the amount you agree to contribute towards any claim, no matter how much you’re claiming. For example, if your $1,500 laptop is stolen and your contents insurance policy has a $1,000 excess, the insurer would pay out $500.
So although your excess doesn’t affect the sum insured recorded in your policy, it does reduce the amount your insurer will contribute towards any claim.
How does sum insured work for contents insurance?
Contents insurance covers things you own that are normally in your house, but not fixed to it. Most policies cover the theft or loss of your possessions, whether they’re in your home or with you somewhere else in New Zealand. Some also cover most types of accidental damage.
Contents sum insured is the maximum payout you can have if all your possessions are stolen or destroyed in something like a house fire, flood or earthquake. Before agreeing to a sum insured, it’s important to make a list of everything you own, including what each item would cost to replace. Most people are surprised by how much it all adds up to.
Contents insurance item limits and sum insured
Most contents insurance policies also set limits on how much they will pay out for more valuable types of items. These are often called ‘item limits’ or ‘event limits’. For example, a policy might have a limit of $5,000 cover per item of jewellery. This is the maximum the insurer will pay out for any item of jewellery, even if the policy’s sum insured is something like $30,000. If you own a piece of jewellery that’s worth more than the jewellery item limit, it needs to be valued and specified in the policy to ensure full cover.
How to calculate the sum insured for house insurance
When it comes to house insurance, the sum insured needs to be enough to rebuild your house after it‘s completely destroyed in something like a fire, flood, volcanic eruption, explosion or earthquake.
You can’t just use how much you paid for your house or its current market value, because those figures include the land. And you can’t use the ‘improvements’ amount in your council rates valuation either, because it doesn’t reflect the full cost to rebuild.
Here are some examples of what needs to be considered when establishing your sum insured. It’s not a complete list, but it’ll give you an idea of what’s involved.
- Demolition of damaged house and removal of all material
- Architect and building plans
- Council consents
- Building materials
- Labour costs
- Scaffolding and construction site fencing
- Council inspections and final sign off
- Utility and waste connections
- Paths, driveways, drainage and landscaping
- Replacing things like a shed, pool, tennis court or retaining wall
You’ll also need somewhere to live while the rebuild is being organised and carried out. That’s why some policies include cover for temporary accommodation costs.
The best way to get a reasonably accurate estimate is to contact a builder, architect or quantity surveyor. They’ll charge a fee of course, but you’ll have a good starting point and added peace of mind. Another option is to use a free online calculator, provided you have a fairly standard house. Just remember that any calculator relies on you entering accurate data as it guides you through.
When to update your house insurance sum insured
If you renovate or add to your home, remember to adjust your sum insured accordingly. This should include any new fixed items, such as an in-ground pool, built-in BBQ, garden shed, deck, outdoor room or paved area. Usually it just requires a quick call to your insurer.
Most insurance specialists also recommend an annual review, even if nothing’s changed. The cost of materials, labour, professional services and consents all tend to increase with time.
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