Home and contents insurance: insure the rebuild, not the price tag

Home building insurance covers the cost of repairing or replacing your house when something goes wrong — the building itself and its fixtures, like plumbing and built-in cabinetry, and usually other structures on the property such as a garage or an inground pool. Per Moneysmart's choosing home insurance guidance, it can also cover legal costs if someone is injured on your property. What it doesn't cover is your belongings — they belong to contents insurance, though the two are often sold as a bundle.

The number the policy runs on is the sum insured — the most the insurer will pay, which you choose when you take the policy out. And here is the mistake Moneysmart names directly: setting it from the market value. Your home's market value includes the land, and the land is still there after the fire or the flood. Insurance is about the cost to rebuild — Moneysmart's words — and the two numbers can be very different, with rebuild costs often rising faster than either.

The rebuild bill is also bigger than the house. Moneysmart's list of easily-missed extras includes demolition, site clean-up, asbestos removal, council fees, architect and surveyor services and temporary accommodation — plus things like landscaping, rubbish removal and solar panels. Even when nothing changes at your place, inflation and high demand for trades can push rebuild costs up while the sum insured stands still. Most insurers offer rebuild calculators; for an unusual house, Moneysmart suggests a builder, quantity surveyor or valuer can price current materials and labour.

Contents insurance covers your household items and personal belongings if they're damaged, lost or stolen — furniture, clothes, the computer, the fridge, the television, tools and jewellery, in Moneysmart's contents insurance guidance. The working definition is roughly what isn't permanently attached: Moneysmart's examples are that floor rugs may be covered but floorboards may not, and pot plants might be covered but garden plants might not. Renters and strata owners don't need building cover — that's the landlord's or body corporate's job — but the belongings are still theirs to insure, and Moneysmart notes "renter's insurance" is simply contents insurance by another name, often with more exclusions and limits.

Most contents policies offer replacement value, which Moneysmart calls new-for-old cover — the full cost of replacing what you lost with new items, which usually costs more than the old ones were worth. It's the best cover and priced accordingly; the cheaper alternative pays only what your belongings were worth at the time, a value that depreciates every year. To work out how much cover you need, Moneysmart suggests listing your belongings at today's replacement prices — and walking each room with your phone camera, so a future claim has a visual record of what you owned.

Then read the limits, because the headline sum isn't the whole story. Most policies cap what you can claim for certain items — Moneysmart's own example: if the limit for electrical appliances is $1,000 and fire destroys your $2,000 television, the difference is yours to pay. Valuables like jewellery and special collections may need to be listed on the policy or added as extra cover, and portable cover for belongings away from home usually carries a per-item cap. The question isn't "how much cover" so much as "how much cover for the things I'd actually claim".

Underinsurance means your insurance won't cover the full cost to rebuild, repair or replace what you've lost. Per Moneysmart's underinsurance guidance, it's very common in Australia and most people don't know they're underinsured — which is exactly what makes it quiet. Nothing announces the gap. The premium gets paid, the renewal arrives, and the shortfall only introduces itself on the day you claim.

It creeps in through ordinary behaviour. A sum insured guessed when the policy was taken out, because a number "sounded right". Renovations — a new kitchen, a deck, an extension — that never made it onto the policy. Rising building costs, inflation and demand for trades lifting the rebuild bill while the sum insured stands still. The extra costs — demolition, clean-up, professional fees — left out of the estimate. Moneysmart's warning is blunt: if you haven't reviewed your insurance for twelve months or more, it's easy to become underinsured. Contents drift the same way, one upgraded appliance at a time.

The policy's shape decides who carries that drift. Moneysmart distinguishes sum insured policies, which pay up to a set amount you chose, from total replacement policies, which cover the full rebuild cost whatever it turns out to be. With a set sum, keeping the number honest is your job — though some policies offer extended cover, a buffer above the sum insured for when rebuilding costs run higher than expected after a total loss. And the consequences of falling short aren't confined to total losses, which is what the amber box beside this is about.

What a policy doesn't cover lives in the PDS — the product disclosure statement, the document that spells out exactly what's covered, what's excluded and where the limits sit. The wording matters more than the brochure: per Moneysmart's storm, flood and fire guidance, storm cover and flood cover are different things — rainwater falling from the sky is one, while flood has a standard definition about water escaping lakes, rivers, creeks, reservoirs, canals or dams — and if your home is at high flood risk, cover costs more or flood may be excluded entirely. Fire has its own fine print: generally a flame has to cause the damage, so heat, smoke, ash and soot damage from a nearby bushfire may not be covered. Moneysmart's other example exclusions include damage caused by the sea, landslides and power failures.

Two dials set what you pay. The premium is the cost of the policy; the excess is the amount you pay towards any claim you make. They trade against each other: per Moneysmart, a higher excess usually means a lower premium — you're keeping more of the small risk yourself in exchange for cheaper cover of the big one. Just make sure the excess is a number you could actually find on a bad day. To compare policies like for like, insurers must provide a Key Fact Sheet in a layout set by the government, with the PDS behind it for the detail.

Then there's renewal, which is where good cover quietly goes bad. Moneysmart's advice is not to simply accept the renewal notice: check the sum insured still reflects inflation and anything you've changed about the property, that the excess is still affordable, whether any exclusions or limits have moved, and whether another insurer offers better value. A yearly pass with a rebuild calculator — and again after any renovation — is what keeps the number on the policy connected to the cost of the rebuild it exists to fund.