Insurance can keep you and your family from financial ruin. But how much do you really need? How should you prioritise different types of insurance? And what are some of the common mistakes people make when buying insurance? In part two of a Herald series, Diana Clement looks into house, contents and car insurance.
Whether it's your dog that vomits a shade of bright yellow on the brand new carpet or the laundry floods after someone leaves the tap on for too long, there are times when things just happen beyond your control.
It's the unexpected that insurance covers you for.
Insurance claims come along when you least expect them, and probably can't afford them. Some of the most common insurance policies we buy cover our house, contents and car.
House insurance covers the cost of repairing or replacing your home if it's damaged by fire, earthquake, impact or other accidents.
The policy is a product that gives you peace of mind, says Terry Jordan of the Insurance Council of New Zealand (ICNZ). Few Kiwis could pay to replace their home out of their own pockets if it was destroyed. Insurance is compulsory if you have a mortgage.
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With home insurance the building, fixtures, fittings and features including fences, driveways, swimming pools, retaining walls are "covered" against accidental damage. Providing there are no relevant exclusions, your insurance company pays to reinstate or replace the damage, less any excess, which is the first part of the claim that everyone pays.
Most policies include a range of extras, such as gradual damage from leaking pipes and alternative accommodation costs if your house becomes unlivable.
Landlord policies for long-term rentals may have additional extras such as methamphetamine contamination and deliberate damage.
Here in New Zealand, residential insurance includes a charge for EQC cover. This is designed to cover you for natural disasters including earthquake, natural landslip, volcanic eruption, hydrothermal activity or a tsunami.
It also covers your residential land within limits against storm and flood damage. EQC covers up to $150,000.
Be aware that homes used for commercial purposes such as businesses or short-term rentals are often not covered by standard house insurance and need specialist commercial policies. They are also excluded from EQC cover.
If you don't buy specialist innkeepers or other commercial cover you could find yourself with no cover at all in the event of a big claim.
Know what your home is worth
Prior to the Christchurch earthquakes policies were open ended and insurance companies would pay what it cost to reinstate the home.
This proved too costly for the insurers and with most insurers you now need to insure for a set sum based on what your home would cost to rebuild.
If you undervalue your estimated cost of rebuilding you could be left with a part built house and have to find the money to finish the job.
Most insurers provide calculators to help work out the sum insured or, to be safe, get a quantity surveyor's report on the cost of rebuilding your home and update it every few years. Building costs change.
Like any insurance there are exclusions. You aren't usually covered against wear and tear, depreciation, rot, vermin damage, electrical breakdown, gradual deterioration, intentional damage caused by occupants, or if you leave your home unoccupied for 30 days or more.
Contents insurance pays for damage to or loss of your personal belongings and household items.
Your premium covers you for accidental loss or damage, or theft, less your excess. It's common to have limits on expensive items such as jewellery, laptops, mobile phones, bicycles and other valuables, although you can usually pay an extra premium to cover items for more.
Most contents policies come with very important added extras such as cover anywhere in New Zealand for your belongings.
This is very useful if you're travelling or you take expensive items such as cell phones or bicycles out of the house.
Do check to see if there is a price limit on these items. If there is you can pay a little extra premium to cover them up to the full replacement value.
Another valuable extra with contents insurance is third party liability protection, which covers you for damage to other people's property.
The liability cover includes your children, says Jordan and a common claim is where a child riding a bicycle causes damage to a parked car. In one case paid out by AA Insurance a teenager on a bicycle swerved to avoid being hit by a bus, but caused $2700 of damage to a car he hit trying to avoid being run over by the bus.
Some policies cover home office equipment and your young adult children's contents while living in halls of residence at university.
And if your keys are lost or illegally duplicated you can have the locks on your home replaced, if it's included in your policy or bought as an added extra, says Jordan.
Whether it's home or contents insurance it's essential to read the policy to understand what you're covered for and what not.
Personal possessions in storage, or in transit to a new home are often not covered.
Likewise damage caused by people invited to your home isn't covered, which can be a problem when teenagers and young adults hold parties.
Car insurance
If you own and use a car you need insurance. That even includes old bangers because of the damage you can cause to other cars and property.
Most people buy fully comprehensive insurance, covering accidents, theft, fire and other damage. It also covers any damage to the other car or property you hit that you're legally liable for.
If you're at fault your insurance company will sort out payment with the third party's insurer.
Third party insurance costs less. It only pays for damage you cause to other cars and property. The other alternative is a policy for third party, fire and theft.
Anyone with a half-decent car costing more than they can afford to replace needs comprehensive insurance. It's usually compulsory for cars bought on finance.
The ICNZ's John Lucas cites an example of a 20-year-old driver who owns a $6000 Toyota Corolla. The cost for full cover would be around $1600 per year, but $500 for third party fire and theft cover or $300 for third party only.
Common mistakes
Owners of cheap cars often think it's not worth insuring them.
That's a big mistake, says Lucas. If you hit another car you could be up for tens of thousands of dollars for the repair.
These days a slight bump to the rear can cost thousands to repair thanks to modern advanced driver-assistance systems (ADAS).
Even minor dings of the bumpers, glass or doors containing these systems can be frighteningly expensive to repair.
The ICNZ's motoring committee toured a repair shop for European cars recently and the members were astounded at the costs of repairing minor damage, says Lucas.
"There was a Bentley station wagon with a crack in the head light and a broken bumper cover. We thought it would be ($3000 to $5000) to repair. It was $14,000."
Even hitting a top-of-the-range bicycle could set you back $15,000.
If your car is written off and you only have third party cover you may need to pay up to $200 for towing and around $30 storage a day for the wreck, says Lucas. That can start to add up if the police need to do forensic work on the car.
If you're at fault in an accident you're liable to pay for the driver's hire car costs, which can be a couple of hundred dollars a day if they use services such as Right2Drive, says Lucas.
Uninsured drivers also don't consider the cost of damage they can do to property such as lampposts, electricity sub stations, houses and even trains.
Fish hooks
Insurance always comes with fish hooks. Non-disclosure is a big one.
That's where the policyholder fails to tell the insurance company material facts that would affect the acceptance of the insurance or the premium.
Failing, for example, to declare that you or other occupants of a house have criminal convictions, or for car insurance you have a previous drink-driving conviction, voids your insurance. You must also declare material changes on renewal.
Non-disclosure was the third biggest issue for those complaining to the Insurance and Financial Services Ombudsman last year.
Policy exclusion was the most frequent type of complaint.
A common fish hook with motor vehicle insurance is taking out a policy in your name for teenage or young adult children because you think it will save money.
That's fraud. What matters is who the main driver is, not who owns the car. If that's the teen/young adult, and the premium was based on the parent, the claim will be declined, says Lucas.
"It is always found out."
Claims for young people are declined if they breach their restricted licence conditions. That includes driving without a supervisor after 10pm, or at any time with passengers.
Insurance - are you covered?:
Monday: What you need and what you don't
Tuesday: House, contents and car insurance
Wednesday: Health insurance
Thursday: Life and income protection insurance
Friday: Travel insurance
Saturday: All your insurance questions answered plus the best tips and advice from the experts