The importance of ensuring that your home is insured to its correct value cannot be over-emphasised because losing an investment of this magnitude will have a devastating impact on your future
Is your home insured for its correct value?
Standing by watching a fire or flood waters destroying our homes is not something we like to think about. However, the fact that the home and its contents are insured does bring a little comfort…until it becomes apparent that the pay-out isn't going to be enough to replace the home.
Homeowners insurance isn't something that we dwell on (after all, nothing is ever going to happen). Yes, we may grudgingly pay the monthly instalments but that's about as far as it goes. Your home is one of your biggest assets (if not the biggest), so it’s really critical to ensure that it’s insured for its correct value - losing one of your biggest investments would be disastrous.
Homeowners are responsible for insuring their homes for the correct value and because of this it's imperative to make sure that the home is insured for its replacement value. So, what is the true replacement value of your home? Firstly, it's important to know that it's not necessarily the purchase price. Building costs in South Africa are high (recent reports indicate that building a new home costs around 30 percent more than buying an existing property) and this needs to be factored into the equation.
If you need a bond, your bank will most probably provide you with a fairly accurate valuation. However, bear in mind that the bank only has to cover itself and the monies advanced on the mortgage, so you may want a second opinion. The other reason to seek a second opinion is you may be able to save some money on your premiums by shopping around. The ins and outs of the factors that go into producing an accurate valuation are beyond the scope of this article and best left to a professional valuator.
The risk of under-insuring a property
Just as there is a risk of over-insuring a property, so too is there a risk of under-insuring it.
“Those who are under insured are going to have problems with a claim,” says Wynand van Vuuren, Head of Legal and Claims, King Price Insurance. “To give an example a person who owns a R1-million property who chooses to only insure the property for R500 000 is going to run into problems if and when he needs to claim, mainly because the insurer will generally only settle for fifty percent of the claim. Although this could prove problematic for those with a small claim, it will be devastating for those whose home is totally destroyed.”
Van Vuuren notes that it's important to remember that the insurable amount involves much more than bricks and mortar.
“Its vital to incorporate the cost of replacing fixtures in the home and homeowners should automatically reassess their insurance needs if they’ve made internal or external improvements on the property. Update the building insurance policy if you have installed a new kitchen or bathroom or built any form of extension on the property. It's important to remember energy-saving devices such as geysers add value to a home and the cost of replacement is usually higher than the standard electrical units. Likewise, the cost of replacing items such as air conditioners and items that electronically control various appliances around the home should all be covered.
Homeowner’s insurance should be reassessed on an annual basis regardless of whether improvements are made. Builders should be able to give you an idea of the value of the home, however, if you have doubts or concerns, it may be an idea to call in the services of a professional valuator, particularly if the home has been owned for a long time. The essential point is that no one should assume the replacement value of their home. Remember the cost of replacing the property is not linked to market value, it's connected to the true cost of rebuilding your home.
In Summary: How can you ensure your home is insured to its correct value?
- You must be aware that your home’s replacement value is not necessarily it’s purchase price.
- You may have problems with a claim if your home is under insured.
- The insurable amount involves much more than bricks and mortar.
- Update your insurance if you have made any form of extension on the property.
Your home is one of your biggest investments, so ensure that you have insured it for what it’s worth.