Understanding underinsurance and securing your peace of mind

Understanding underinsurance and what it means is crucial for knowing if you are fully protecting your assets. Learn about intentional and unintentional underinsurance, its consequences, and how you can avoid it.

Being adequately insured doesn’t end with getting insurance coverage as a ‘set and forget’. It's important to remember that your circumstances will change over time, and as a result, your insurance needs will too. Not reviewing your policies when they are up for renewal or proactively when your circumstances change can leave you vulnerable to underinsurance - a risk faced by many.

Defining underinsurance

Underinsurance occurs when your insurance policy doesn’t fully cover the value of your assets you have listed so there is a gap in the cost to repair or replace them if you need to make a claim. This can happen in two main ways:

Intentional underinsurance

Intentional underinsurance occurs when a policyholder undervalues their assets to reduce their insurance premium. However, this cost-cutting approach can leave them exposed to additional out-of-pocket expenses in the event of a claim, as their policy might not compensate the insured for the full value of the item or in the event of a larger asset such as a home, the policy may not cover the full cost of rebuilding, repairing, or replacing the home and/or contents.

Unintentional underinsurance

Unintentional underinsurance can occur because circumstances change and the existing insurance policy isn’t updated to reflect them. This commonly happens when home improvements and car modifications are made, or valuable furniture or large electronics are purchased and the value of your assets increase, but the sum insured on your policy does not.

Consequences of underinsurance

In the unfortunate circumstance an insured person would need to claim from an insured event, and they had insufficient policy coverage, it can have inconvenient and costly consequences.

Financial strain can come from the inability to fully replace or repair damaged or lost assets, leading to unexpected expenses that will put pressure on budgets and savings. For instance, without adequate home insurance, homeowners may struggle to cover the costs of rebuilding their property after a weather event. Inadequate car insurance can leave policyholders unable to afford repairs or replacement following an accident.

Underinsurance can also lead to prolonged periods of recovery. An emotional and psychological toll can occur when an underinsured person faces the challenges of rebuilding their lives.

Make time for life admin

Avoiding underinsurance can be simpler than you may think. Reviewing your insurance regularly can help you identify potential gaps in your cover and understand whether changes may be needed.

1. Conduct a comprehensive insurance review: assess all your insurance policies, including home, contents, and car. Understand the coverage limits, policy terms, and exclusions.
2. Assess your coverage needs: major life changes, such as the purchase of an engagement ring, require adjustments to your insurance coverage. Ensure that all your assets are adequately covered. Our building and contents calculators can help give you an up-to-date estimate.
3. Consult an insurance professional: seek advice from an insurance expert if you suspect you’re underinsured on 1300 557 155 or speak with us in branch.
4. Adjust your policies: based on your review and assessment, make necessary changes to your policies. This may involve increasing coverage limits or adding additional policies.
5. Review and update regularly: mark your calendar or create an event in your phone to remind you to make time to review your policies annually or after significant life events to prevent unintentional underinsurance and ensure ongoing protection.

By taking these measures, you may reduce the risks of underinsurance and enjoy the peace of mind that comes with knowing your assets and lifestyle are adequately insured.