How much do you insure your properties for?

Hi all,

I've just got a few renewal invoices for insurance with EBM and I'm wondering if I'm over-insuring my properties. This one in particular is a 30+ year old house worth about $300k. To demo and rebuilt a much better house would be about $250k. I have it insured for $330k.

I have another one which is a 30+ year old house on a large block (subdividable) worth $400k. Again, to demo and rebuild a better home could probably be done for under $250k. How should I figure out how much to insure it for?

So my question is... what do you insure your properties for? Is it their market value? Or the cost to demo and rebuild?

Thanks!

 

Have you included the cost of landscaping, curtains/blinds and unexpected ground works in the $250k?

I insure for about $325k to replace a single story. Could build it for less, but it is amazing how things add up.

 

I've always insured all my properties for the price I paid for them. At least then I know anything unexpected should be well and truly covered.

 

Yeah but there is no point insuring the land as it can’t burn down.

 

Very good point.

 

Should be insuring for the cost to rebuild, including demo/removal, plans (architect/draftee), construction including finishes. Keep in mind what comes under build and what is contents. Often people only insure building on investment and find out after that many items aren't covered as they're considered contents.

Most valuations which have a insurance replacement amount, I find these to be reasonably accurate.

 

Your mortgagee will often stipulate the minimum insurance amount

 

The borrower will stipulate the minimum insurance?

Oh, you mean mortgagee?

 

LOL not enough coffee

 

This is not a recommendation I actively give people, but personally I only insure them for max $200k a pop to reduce my premiums significantly. For me its accepting that the risk of a total loss due to major fire/flood is very very small. In the rare event of having to fork out $250k for a brand new spec home, I am also adding significant value to the property so I am happy to fork out the $50k difference myself for this upside.

Also need to consider that if you have multiple properties, you could be paying tens of thousands a year in premiums which over time adds up close to building a brand new home anyway

 

This calculator is pretty handy

http://homebuilding.cordell.com.au/index.php?c=survey&profile=22

 

Picking a set amount isn't a smart move because the cost of rebuild will vary depending on the location of your property, its original and/or replacement spec and the current state of the economy and property cycle. These factors can vary the price greatly in the event of a total loss.

Find out the value of your land, the price of a new home (get quotes as per any other quote), demolition and removal costs and just crunch some numbers, then insure for that amount. The difference between insuring for $250k and $350k is absolute peanuts with most companies so it's always better to over estimate if anything, particularly if you don't have adequate funds to make up any shortfall.

It's unlikely you'll ever experience a total loss, but it's a personal thing. If you have $500k sitting in the bank vs. $20k, you might want a different amount and be willing to accept great risk. Everyone's risk profile is different.

 

My insurance has gap cover which will insure up to 25% above the insured amount.

 

I don't think it works like that - for eg, if they discover you've only insured for 75% of the value, they'll only pay 75% of the sum insured. Not an expert, but pretty confident this is the case.

 

Google 'underinsured' or check it out on an insurer's website.

This is a very serious issue if your house is only partially damaged. For example if half is destroyed, you won't be paid half of $200,000.

Here's what CANSTAR says:
'Let’s say you insure your home for $150,000, but it’s really worth $250,000. A bushfire sweeps through the area and does $80,000 damage to your home. Your insurer may have the right to reduce the payout in proportion to the level of under-insurance.

In this case, there might be a payment of only $48,000. Sadly, that is nowhere near enough to repair or replace a $250,000 home.'
Underinsurance: Is There A Gap In Your Coverage? - CANSTAR

 

Spot on with the analysis.

 

Check with your insurer about under insurance and any potential consequences. Relevant to some and not to others, always read the PDS

 

I was going to talk about underinsurance but others have already mentioned it.

I would be very cautious if insuring for 200k a pop and being underinsured.

The cost different between 200k and 400k isn't double just used iselect calculator (sorry for the fake details) but the difference annual cost on what I inputted was 750 p.a for 400k and 565 p.a. for the 200k or less than $200 a year. Everything else was the same...

So as you put it if the house burns down you would be short 50k which you would need to cough up which would be 250 years before you would of broken even. However even if there was 50k worth of damage and they only give you 80% or 40k that 10k shortfall would still take you 50 years....

I am all for saving money and yes having some insurance is better than none but the amount you are 'saving' to me could actually cost you if any event happened.

My PPOR was flooded back in Dec 2016 - all up the insurance company has probably spent about 30k is my guess from reports, drying out, inspections, replacements, etc etc. If I was underinsured by 20% that would be 6k less I would of had to fork out (which isn't much) but that would take me 30 years at $200 p.a. just to get back to even (and today's dollars are worth more than future dollars).

So really up to you and how you want to run your portfolio but I wouldn't recommend what you are doing to people who do not understand the risk and then get burnt or hit with only 50% underinsurance and having to find $x0,000 to get their property back to a liveable/tenantable state which people may not have .

 

As I said, not something I openly recommend to people - only what I do based on my own portfolio, types of properties, knowing how a claim is processed from start to finish, having great contacts with all types of trades, my risk assessment of a building insurance claim being extremely unlikely, and in the event of one - happy to fork out a percentage of the cost to rectify. I know of one investor with a very large portfolio who is self insuring the building component entirely to reign in costs. For me its all about risk mitigation vs costs

Now that I've said that, I bet I'm going to need a building insurance claim soon

 

Yup all good, my parents don't have life insurance anymore and have more debt than they ever had before.

The reason they cancelled it is that they are self sufficient without working and have enough money to fund any treatments needed.

However unfortunately my money was diagnosed with cancer a year or two after cancelling it. She has recovered from it but if they kept the trauma policy they would of gotten a payout more than the saving they made.

Insurance it is one expense I feel people hate to pay but my risk profile is I would rather pay and not claim than not pay (or not pay enough) and claim.

I am sure everyone would pay $50,000 a year if it would be guaranteed we couldn't die or get serious illness/tpd (living a normal life and not changing to bank robberies ).