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Tuesday, March 26, 2013

How our insurance policies are going to change, get more complicated, and likely to cost much more.

As this year progresses insurers are changing all existing house insurance policies from “full replacement” to “sum assured”. The change means no one will automatically have a “like for like” insurance policy.

The change will require each home owner to work out how much it would cost to replace their house, and insure it for that amount.  It won’t just be the quality of your house that affects the cost of rebuilding it, there are also factors such as the land it is on (e.g. on a slope or a hillside, access ways, retaining walls).

Replacement cost will be totally separate from rateable value or market value. If the amount you insure your house for is too little, you won’t get it rebuilt the way it was (and you might even be penalised for being underinsured). Insure for too much and you will being paying too much money and only get what you had.

Year after year the sum will need to be adjusted for increasing building costs (they never come down). Do you get the house re-valued each year, or accept the recommended increase provided by your insurance company? Get this wrong and again you may be underinsured.

The vicious underside of this new policy approach is that in a falling housing market building costs may still rise while market values decrease: your policy payments will continue to increase while the value of the house drops. Invariably cost inflation increases are far ahead of wage and salary increases, which mean insurance policies will become less and less affordable.

Against this background you can visit IAG’s brand new insurance website need2know.org.nz (here). The website is designed to help policy holders from all companies understand how the new approach will affect them.

The following is an extract from IAG’s guide to the changes which can be downloaded from the website:

What is the cost of rebuilding?

An estimate of the cost of rebuilding a home should be based on what it could cost to rebuild the house on its current site and based on its present size, standard and type of construction. It should include other structures such as decks, driveways, sheds, garages and fences.

While building costs will be a significant portion of the estimate, it should also take into account the demolition and removal of debris, site preparation, professional fees and compliance costs. The need2know.org.nz** calculator provides some allowance for these factors when estimating a home’s likely rebuilding cost.

The estimate should also include any retaining walls, Recreational Features (tennis courts, permanent swimming pools, and spa pools), and features defined in our home policy as Special Features. Check your policy wording for details about the level of cover you have (if any)

Visiting IAG’s website (here) could be very important to your financial and emotional health.

Other issues associated with the house insurance policy changes were recently blogged here.

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