Underinsurance: Why it’s important to insure your home contents for the right value

What is underinsurance?

Underinsurance is when the amount you’ve chosen to insure all your belongings for is less than their actual replacement value, i.e., what everything will cost to be replaced new.

This often happens because people are in a rush to insure their things and just pick a round number that “sounds right” or they’ve missed a couple of valuable items stored in the back of their cupboards. Either way, being underinsured will leave you out of pocket when you have to claim.

How do I find out if I’m underinsured?

The bad news is that you will usually only find out when you make a claim, and your insurer sends an assessor to determine the value of your loss or damage.

In assessing your claim, the assessor checks whether the amount you insured your things for was enough to replace everything in your house before your claim happened. What we mean by ‘replace everything’ is that the assessor will check what it would cost to replace all of your belongings new, today.

For example, if you’re wanting to insure your iPhone 11, you should insure it for what it costs to buy a new one today. If you own an iPhone 5 and it’s no longer manufactured, you should insure it for the value of the next model up (which at the time of writing is the iPhone 6s).

Insuring your stuff for its replacement value is important to ensure you are not out of pocket after a claim. If the assessor determines that you were underinsured, they will apply the principle of ‘average’ and pay out only a portion of your claim.

How does average work?

‘Average’ is when the proportion by which you are underinsured is used to reduce the insurance payout on each of your claims. For example, if you insured your contents for R200,000 but they are worth R400,000, you have effectively only insured half of your contents. So your insurer will only pay out half of your claim.

How will underinsurance affect my claim?

What if you are underinsured and lost all your stuff in one fell swoop?

Say the replacement value of all your stuff is R625,000. But you only insured your things for R500,000. In an unfortunate accident, your house burns down and everything is lost. You call up your insurer, they approve your claim and pay you R500,000.

So, to get yourself back into the position you were in before the fire, you would have to pay the missing R125,000 out of your own pocket.

What would happen if only some of your things were stolen?

If you have a break-in and make a claim of R100,000 for your TV, a couple of laptops and all of your jewellery, the same principle will apply. Since you insured your contents for only 80% of their value (i.e., R500,000 instead of R625,000) your insurer will only pay R80,000 of your claim, leaving you short by R20,000.

The thing to remember is that it’s the total value of your things that counts. When calculating the value of your contents you may have correctly priced your TV and valuables at R100,000 but then priced your furniture at R50,000 when its replacement value was in fact R175,000 – but average will still apply, as your total insured value is too low.

And if your stuff is accidentally damaged and could be repaired?

Average is also applied when your belongings break and can be repaired.

Let’s say you chose to cover your iPhone 6 for R4 800 but the replacement value of a new phone is R6,000. You drop it and the screen breaks. A new screen for an iPhone 6 costs R1,000 but because you only insured the phone for 80% of its value, your insurer will only pay you 80% of the value of a replacement screen, which is R800 minus your excess.

If you find yourself in any of the above examples thinking that you have been wronged in the assessment, remember that you can always dispute the issue with your insurer and your policy will guide you on what steps to follow.

How do I avoid underinsurance?

Calculate your home contents value correctly from the get-go

Calculating the value of your contents can be tricky, but there are rules of thumb to help you do it. Have a look here to see how you can get the most accurate value for your things.

The main thing to remember is to insure your items for their replacement value – what it would cost to buy them new today. Also, if you are insuring all the things in your home, make sure you include everything – even your clothes, cutlery and book collection.

If you want to insure something for less than what it costs to replace, be sure to tell your insurer

If you choose to insure an item for less than what it would cost to replace, your insurer must be made aware of it. If they accept the request, they will not apply average to any of your future claims. Note that the insurer might adjust your monthly premium a little before accepting your request.

Frequently update the value of all of your things

Regularly review all the things you own to see what has been upgraded or added. Every little thing adds up, and the value you calculate could be quite different to the one you got when you originally bought your insurance.

Some Naked clients think it’s a good idea to add a buffer of R50,000 to R100,000 on top of the total contents value that they calculate to account for small purchases they make throughout the year. It helps in not having to update their value every time they buy something.

Having a critical look at what you insured your stuff for every year is certainly first prize. But if you’re absolutely certain that you haven’t purchased or upgraded anything and you don’t have the time or energy to go through the process, at a minimum add inflation to the amount you’ve insured all your stuff for.

We understand that the intricacies of underinsurance can be complicated and overwhelming. But by valuing your things and maintaining that value for the right amount, the whole ordeal of underinsurance and average can be avoided altogether.