Insure Carefully Now Or Pay For It Later

Newcastle Herald

Monday May 14, 2001

Making Money Paul Clitheroe

MY clients often ask me what I think of insurance, and despite the appalling and disgraceful collapse of HIH shaking public faith in the industry, my response is it's an essential part of achieving financial security.

The key to it though is making sure you have the right sort, and in just the right amounts.

It's a waste of money having too much insurance, but you can't afford to have too little.

One of life's great financial hazards is under-insurance.

If, for example, your home is destroyed by fire, your insurance policy will cover the costs of replacing the home, but only up to the value for which the original one was insured.

If the property is under-insured you will be left considerably out of pocket if you intend to rebuild a home of equal value.

What's more, if the property is substantially underinsured, the insurer may only pay part of the claim, or, in the worse case scenario, refuse the claim entirely.

Most people under-insure because they simply have no idea of their property's current value.

Others under-insure in a shortsighted attempt to save money on their insurance premiums. But whatever the reason the results of under-insuring can be nothing less than devastating.

Consider this: When the Ash Wednesday fires ripped through Victoria in 1983, around 40% of the damaged or destroyed homes were under-insured.

The Newcastle earthquake of 1989 caused untold damage to the city, the distress of which was compounded when around 60% of home-owners found their homes were under-insured.

When a freak hailstorm hit Sydney in April 1999, around 40% of the homes damaged were under-insured ? some by as much as 30%. Tragically, almost 9% of these homes were not covered by insurance at all.

But under-insurance is by no means limited to bricks and mortar.

Statistics show that we under-insure our household contents by about 30% of their replacement value. Items like CD collections, tools of trade, clothes and goods held in storage are regularly undervalued, and so are under-insured.

Sadly, many of us aren't aware of a problem until we make a claim.

One way around the problem is to have a registered valuer or builder value your home for insurance purposes.

This could cost around $300 plus, but getting a realistic valuation ? leading to a more realistic level of insurance ? could be the best investment you've made.

Of course, you are also perfectly entitled to value your home yourself.

If you decide to do this be sure to add around 10% to 20% of the replacement building cost to allow for expenses such as the cost of new plans and council fees, removal of debris from the site, relocation costs and so on.

When you take out household contents insurance you really need to check the fine print.

Some replacement policies may not finance the replacement of all old items with new items.

You may also find, for example, that your insurer will not replace damaged carpets over five years old with new carpets.

The best advice I can give when it comes to insurance is to go with a reputable company, one that has been around for the long haul and preferably has been personally recommended to you, as some have a better record for paying more readily than others (and also for staying in business).

You also need to read the fine print very closely, paying particular attention to the way the insurance company defines things, as this can also be significant when you go to make a claim.

And be sure to complete any application or proposal honestly. If your insurer discovers any details to be incorrect, they can legally refuse to pay out a claim. Paul Clitheroe is the chief commentator of the Money magazine, and a founding director of ipac, a leading financial planning firm. ipac has an office in Newcastle.

© 2001 Newcastle Herald

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