It’s time to renew our annual home and contents insurance. Every year, the renewal arrives, I look at it, and have no idea whether the amount we are insured for is reasonable or not. How on earth do I know how much it will cost to rebuild our house? Or what the total worth of all the “stuff” we’ve chosen to bring into it over the last 20 years is? Usually I look at it, shrug, and pay. In the spirit of personal finance, this year it is time to take a deeper look at what we can do. In this post I am investigating home insurance on a building.
Insurance in General
I’ve mentioned before, I really don’t like insurance. I feel as if it is just throwing money at people who have a statistical advantage (in the form of highly trained actuaries and sophisticated algorithms) of coming out ahead. However, as an individual, the question becomes – can I afford not to have insurance? For small things, like a TV or a fridge, yes. That’s what an emergency fund is for. For the entire house and contents? No. So, instead of being resentful at the amount of money we pay for insurance, I need to reframe my thinking.
I was listening to Pete Matthew’s Meaningful Money podcast, where he mentioned he uses another word for insurance – protection. Even though I don’t see our house as part of our Net Worth, if we lost it, there’s nearly 2 decades worth of mortgage payments gone with nothing to show for it. Although some days I look at all the clutter-junk we have accumulated and think “Just burn it all down so I can start again,” there is a significant cost in replacing every single item in a house. Even just the basics. Just to make it liveable.
So insurance is only partially about covering the tiny statistical risk that our house will burn to the ground. It’s mostly about protecting our financial future. There’s no use investing and saving for (early) retirement if it might all be blown in a single incident.
Now back to the real issue:
How Much Should You Insure Your Home For?
Do you use the amount it is worth if you could sell it today? This is being written at a time when most of Australia’s house prices are going crazy. But it is the real estate market that drives house prices. Human wants and desires. The actual materials used in construction do not necessarily reflect in the selling price of a house. Case in point:
- A three bedroom house at 9 Wandsworth St, Parramatta; approximate size: 100m2 = $1,100,000
- A three bedroom house at 3 Chivers Cl, Lithgow: approximate size 100m2 = $425,000
There is no way that the house at Parramatta contains 3 times the materials, or even materials that are three times the quality of those in the house at Lithgow. Availability, location and desire drives the price of these houses, so you can’t use the market price of your house to estimate the rebuilding costs.
Luckily, we now live in a world with Internet. Insurance companies offer online tools that allow you to calculate the approximate cost of rebuilding your house. I tried a few, before realising – they are all actually drawing on the same informational database, CoreLogic’s Cordell Costings. “CoreLogic is the largest provider of property information, analytics and property-related risk management services in Australia and New Zealand,” according to their website. They have been collecting data on housing construction and the industry since 1971, so have massive data points on all aspects of housing construction. Once I’d determined that all the tools were basically the same, I decided to go with the one that had the nicest user interface, along with helpful explanations. This was on the NRMA website.
Calculating Home Insurance
This tool is very easy to use, although you do need a rough idea of areas to get the most accurate result. At least, you need to be able to estimate in metres, or use a tape measure. If this is tricky, see if a family member or friend will help. You are likely to be doing them a favour, as they have probably not calculated their own home correctly for insurance either. You don’t even have to know the total area of your home (although this helps). I found some very old documentation that showed our house is 128m2. If you really wanted to figure it out for yourself, you can try either of these methods:
Use Google Maps
Zoom right in on your house in satellite view. There is a graphical scale on the very bottom right of the screen that displays a 10m (or 20 foot) distance.
Get a ruler and measure your house boundaries in mm on Google Maps (A):
(Yes, I held a plastic ruler up against my screen. It’s not very accurate, but all you need is a rough idea).
Measure the length of the Google Maps graphical scale that represents 10 metres (B):
To figure out each wall length in metres, the formula is A ÷ B x 10:
Walk Around Your House
Alternatively, walk around your house, and count the number of steps you take. Multiply the length of your foot/stride by the number of steps to get a measure of the size of each wall in centimetres. If you aren’t sure about converting centimetres to metres, just Google “cm to metres“. Google will display a handy calculator you can enter your numbers into directly.
If it’s been some time since you’ve needed to calculate area, this video from Khan Academy will walk (hehe) you through the process:
You will also need a rough idea of the size of each room in your house. You can either pace them out as above, use a tape measure, or simply estimate based on gradings of small, medium or large.
As you move through the questions, make sure you take a quick look at the explanation for each question. The more accurately you can answer them, the more likely you are to get an idea of insurance level that is neither too much, nor too little.
Our Home Value
I actually went through the home insurance calculator a few times, changing the odd setting to see what a difference it makes. The tool remembers most of your previous answers, so it is fairly easy to flick back and forth between pages. I’m not sure about their definition of a verandah – we’ve got a slab of concrete out the back, but it isn’t covered in any way. The difference between adding and not adding the verandah comes out to $34,000. On one hand, that could be absorbed by us and our liquid investments. On the other hand, the cost to insure at the higher price is only $35/year.
Our final estimate (including the verandah):
Just out of curiosity, I wanted to see what the difference in building costs would be depending on where a house is located. I used the postcodes of both houses mentioned above, keeping all other answers the same as my verandah quote. The difference was $22,000 – still nowhere near enough to justify the different market prices.
Great! Now you know how much home insurance you need to buy. Of course, not all home insurance policies are created equal. Does the policy only include defined events such as flood or fire, or will it pay out for any damage? Are extras such as demolition covered? What about temporary accommodation? When considering insurance policies, you must read the Product Disclosure Statement. To learn more about what to expect in a home insurance policy, the Insurance Council of Australia has created an excellent explanatory website, where you can read more about home building insurance. Once you understand what you are looking for in a policy, you can use one of the many comparison websites to shop around for the best price. They make you pay with an email address (and will immediately take advantage by sending through emails), but thanks to the Australian anti-spam laws, you are able to unsubscribe without penalty.
In the next post I will be looking at contents insurance.
How do you calculate the value of your home for insurance? Have you a favourite online calculator?