Property Insurance Is A Bit Of A Misnomer
Have you had cause to make a property claim because of fire, flood or anything else that caused total destruction of your property?
Many of us who have not had the cause to make a total claim do not realise some of the implications of owning a property insurance policy.
If you have total property destruction you will need to demolish what is left of your building and you will also need to remove it. This cost alone would quite likely be in the excess of $20,000.
When you go to rebuild your new property you are also faced with architect fees, council fees, increased material costs etc. that you just had not planned for when you initially took out your property insurance.
On top of that, if you have a mortgage you will still have to pay your monthly premiums without any income from rental.
Add these costs to the cost of the physical rebuild and you have well above what most people will estimate as the replacement cost of the property.
So let’s analyse this for a house that you have owned for 5 years and bought new:
Property Purchase price $ 350,000
Land value 215,000
Building value 135,000
Insurance $200,000
Replacement costs
Materials and labour 170,000
Demolish and Removal 20,000
Council fees 16,000
Architect fees 27,000
Landscaping 5,000
Incidentals 5,000
Loss of rent for 18 months 29,000
272,000
OUT OF POCKET $ 72,000
These figures are fictitious but you do see how costs can escalate well above what you may have thought for replacement.
BUT here is another crunch!
What about the ‘under insurance’ rule?
If you have ended up in a situation as demonstrated above you will more than likely find yourself in a situation of only receiving in the vicinity of $130,000 from your insurance company.
WHY, you might say?
Well there is what is called ‘under insurance’ and this means can be explained this way. When you take out an insurance policy on your property the insurance company assumes that you will take half the risk of any problems you may have. In other words, it will only pay you 50% of any claim that you make. Some insurance companies pay a little higher, but generally speaking it is only 50%.
So where, in the above example you thought you were only going to be out of pocket $72,000 you will in actual fact be out of pocket about $140,000.
So how does that make you feel about your property insurance now?
If you have an older property the material costs could be much, much higher than the original cost price.
The best way to sort this problem out is to ring a builder and get a ‘To Build’ quote so that you know your true figures.
Insurance is a tax deductible expense so if you are paying another $200 – $300 you will get tax relief anyway and you will also get mental relief knowing that you are covered for a total rebuild.
If you are not covered and you do suffer from this type of disaster it could ruin your goals of becoming financially independent. It is just not worth it.
Filed Under: Property Investment • Property Investment Tips
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