Is your home under-insured?

The rise in property values over the last four years may mean your home is significantly under-insured. In the event of a major catastrophe, a fire, earthquake or any other major "peril", you could find yourself severely out of pocket warns Vic Field of By Design, the short-term arm of broker Glenrand MIB.

Field cites the example of a home bought ten years ago for R250 000. It has since appreciated in market value to R750 000. The under-insured component could, therefore, be as much as R500 000. Bond insurance would cover say 90 percent of the original R250 000, if the home was financed in the typical way with a ten percent deposit.

That cover secures the loan to the homeowner; but it does nothing to cover the appreciation in the home’s value, i.e. the replacement value of the property at today's prices. It's not up to the bank to look after you in this respect; the onus is on you to make certain your home is adequately insured.

Moreover, alterations and additions will add to this problem. "When deciding the correct value to insure one must consider the price of rebuilding the house from the ground, plus cost of demolition and professional fees (moving of debris and new plans following fire or storm damage), fire extinguishing charges, and public authorities requirements," says Field.

"The cost of providing sufficient cover is negligible in the scheme of things. For example, insurance for a home valued at R1-million would typically start at around R150 per month if the insurance were placed in the open market where rates (the cost per R1000 of cover) are around 0.16 percent," he adds.

Interestingly were you to insure precisely the same house through a bank the rate per thousand rand would be quite significantly higher at around 0.225 percent.

"Anyone with a home loan is obliged by the banks to insure the value of that loan. However, beyond that the homeowner has to look out for his or her own interests and with property prices rising by some 18 percent per annum, it's absolutely critical to re-assess the cover on your home.

"What's more in doing so, you can lump your homeowners cover with your motor and householders' cover (which insures the contents of your home) thereby reducing the overall rate at which your cover is provided.

"An interesting aside is that homeowners who pledge their homes as security for loans are in danger of having to honour those loans out of their own pocket should they be under insured.

"Ironically, people will often insure their cellphones before they make sure that their house is properly covered. The two are hardly in the same league and while the loss of the one is readily replaceable, the loss of the other could literally bankrupt you," says Field.