Insuring the contents of your home gives you the peace of mind that you will be able to get your valuables replaced if something happens to it, which is why underinsuring is probably the worst thing you could do besides having no insurance at all.
While it is easy to think that you may never need to replace the entire contents of your home, just think of the damage the April floods in KwaZulu-Natal caused to people who also thought it would never happen to them. Many consumers do not know much insurance is enough to keep them covered.
“Our data shows that most claimants in KwaZulu-Natal bought enough insurance to pay for the damages to their buildings caused by the flood and the majority also purchased adequate cover for the contents of their homes,” says Ernest North, co-founder of Naked, a digital insurance platform, says.
However, he points out, among those who were underinsured, the gap between the cover they had in place and the cost of replacing or repairs was significant.
“Some faced a shortfall between the insurance pay-out and the cost of replacing or repairing their stolen or damaged items that totalled up to hundreds of thousands of rand.
“Some policyholders underestimate the actual replacement cost of their everyday items, as well as the possibility of a total loss. It is all too easy to underinsure your stuff if you do not have an inventory of what you own and how much it will cost to replace. If you experience a total loss, you could end up seriously out of pocket,” North says.
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How do you know if you have enough insurance?
North recommends this simple exercise: just calculate how much it will cost to replace all the clothes in your closet. Add to that the cost of replacing everything in your kitchen, especially if you have high-quality small appliances or good glassware, cutlery and crockery.
Do this for all the rooms in your house.
He says many insurance customers also forget to adjust their policies when they buy something new, such as an expensive new TV or review their policies once a year to ensure they are keeping up with inflation.
“It is easy to lose sight of how expensive some items might be to replace, especially items such as furniture and large appliances.
What happens if you do not have enough cover and experience a total loss?
“Many people only learn they are underinsured after their house burns down or gets cleaned out in a robbery and they claim,” says North.
“When assessing a claim, an assessor from the insurer will evaluate what it would cost to replace all of your belongings with new ones at today’s prices. If the replacement value of all your belongings is R625 000, but you only insured your property for R500 000, you will need to find R125 000 to fully replace everything.”
Few people have that kind of money in their savings accounts.
An “average” pay-out
If you are underinsured, the assessor will apply the principle of ‘average’ to determine your pay-out.
‘Average’ means the proportion by which you are underinsured is used to reduce the insurance pay-out on each of your claims.
Imagine you insured your household contents for R250 000, but their true worth is R500 000. In a burglary, a thief steals your OLED TV and some jewellery worth a combined R100 000. When you claim, you will receive only R50 000 (minus your excess) because you are underinsured by 50%.
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How much insurance do you need?
North says it is important to insure your items for what it would cost to buy them new today.
“Also, if you insure everything in your home, make sure you include everything: your clothes, cutlery and book collection. Go through your home room by room, closet by closet, to check what you own and would want to replace if it is stolen or damaged. Remember your garage, storage rooms or Wendy house too.”
He suggests that you use an inventory app or spreadsheet to track the replacement value of each item. If you are not sure, go online to check recent pricing.
If your model or item is no longer manufactured, you should look at the price of the items that are closest to yours. Also notify your insurer if you want to insure an item for less than what it would cost to replace it.
Regularly reviewing everything you own will also help you remember what has been upgraded or added.
Some insurance customers add a buffer of R50 000 to R100 000 on top of the total contents value to account for small purchases they make throughout the year to avoid updating their policies every time they buy something new.
It is also important to review your possessions every year or two to check if your policy is keeping up with inflation.