WHAT IS YOUR INSURANCE WORTH?

What you need / What to look out for.

Australians often spend all their time worrying about securing the best mortgage when buying their first home but don't pay too much attention to what insurance they really need. Louise Goldsbury investigates.

When purchasing property and seeking out the best deal on a mortgage, many buyers overlook insurance. But insurance – whether it's home and contents, life or disability and unemployment cover – is an essential part of buying and keeping your home.

Lisa Montgomery, National Manager of Consumer Advocacy at Resi Mortgage Corporation, cannot emphasise enough the need to be adequately insured. Having worked in the industry for 22 years, however, she understands it can be difficult to add insurance to the long 1st of responsibilities faced when purchasing property.

“People are so bombarded with information when they are getting their mortgage that when the time comes to consider insurance for the house and for themselves; it gets to the point of overload. Because you don't need to provide an immediate response to these things, you tend to let them go. But house and contents insurance, life, disability and unemployment insurance are just as important as any other facet of getting your loan, ” Montgomery says.

According to Montgomery, the other problem is that people are often unsure about the amount for which they should insure their property. It's quite common for purchasers of new property to insure for the amount of the purchase price, which obviously includes the land value, but this is not an accurate method. The best indication of the value of the improvements to your land will be found on your property valuation (usually obtained when you apply for a loan). The valuer almost always gives an indication of insurance value and your lender can provide you with this figure.

“In most cases, your solicitor will also require a copy of your building insurance policy or 'certificate of currency' from the insurer at time of settlement. This will need to be correctly endorsed with your lender's details.

This requirement is extremely important, particularly in the event that you have a total loss and your property is destroyed – it gives peace of mind to not only you, but to your lender.”

A common mistake is choosing insurance according to the price, rather than the features and benefits. “It's important to read the fine print on your policy, as not all companies are the same, ” says Montgomery. You could be paying top dollar every year and get a nasty surprise when you come to make a claim. For example, during the aftermath of the Newcastle earthquake in the late 80s, a high percentage of people were substantially underinsured. Many of the homes around the epicentre were damaged beyond repair and many owners had not insured their properties enough to cover demolition and rebuilding, leaving them in a difficult position. Often we prepare for minor setbacks, such as broken windows or storm damage; rarely do we consider the chance of a total loss. ”

Contents insurance is also important, but too often dismissed. Most contents policies will provide replacement of possessions in the event of a claim, but it is important to check if there are limits placed on certain items, such as mobile phones, cameras and other expensive gadgets. It depends on the level of insurance cover of each policy as to whether these items are covered if stolen or destroyed outside the home. Of course, this type of “blue ribbon” coverage may come at a premium.

Other types of insurance that are even more commonly overlooked include life, disability and unemployment cover. When taking out a mortgage there are many costs that mount up, so when it comes to making a choice about protecting our family, or ourselves, we often consider it unnecessary and or expensive. But with the average mortgage increasing substantially over the last few years, this type of insurance is as important as any other aspect of the loan process. It is advisable for all new home owners to re -assess their personal insurance cover to ensure peace of mind should any unforeseen event occur. As Montgomery has observed, single people without dependants do not usually consider life cover because they are not overly concerned with what happens if they pass away. But, she warns, it they become unemployed or disabled, servicing their debt could become a serious issue.

Montgomery advises people to research several policies from different companies to ensure they get the most appropriate insurance for their needs and for the best, but not necessarily cheapest, price. “When considering the cost of mortgage protection cover, life insurance is often the least expensive, mainly because there's more chance of you becoming unemployed or disabled. But your cover shouldn't be chosen on price. Choose a cover that will complement your existing situation, as well as other benefits you may be entitled to under your current superannuation policy. Don't pay good money for something that won't be beneficial in the long run – do your research.

For couples, especially those with children, Montgomery strongly advocates mortgage protection cover and external life cover. 'If you have an existing life policy, it may cover paying back the mortgage, but not the ongoing financial support needed by your family, so covering the mortgage and your family's future lifestyle is important.”

Keep in mind that not all lenders provide mortgage protection cover for borrowers, in which case you should do your homework and buy independent cover from an accredited consultant. Salary continuance is one example of cover that has gained in popularity over the past decade. As Montgomery explains, “This type of cover usually pays the individual a percentage of their salary if they become sick or disabled. The cost varies depending on the conditions you choose for your policy. There are several levels of cover and it's not uncommon for some larger employers to organise a bulk deal for staff to lower the cost.”

Source: Your Mortgage Magazine – February 2005

Tel (03) 98000505    Fax (03) 98000808    Mobile 0408979033    Steady Finance © 2005. All Rights Reserved.