How much should your investment property be insured for?

If your policy includes building cover, your insurer will ask you to nominate the sum insured. As the property owner and policyholder, it’s your responsibility to choose this figure. Your insurer won’t calculate it for you, so it’s up to you to make sure it’s enough to cover the full cost of rebuilding your property if it’s damaged or destroyed.

In this case, it’s all about the figure: If your property is damaged extensively (e.g. destroyed by fire) and needs $750,000 to rebuild, but your sum insured is only $500,000, you will be responsible for the $250,000 shortfall.

When you nominate too much, there is also a cost, since insurers generally cover only losses at actual cost, but you will still pay higher premiums. 

If you want to properly calculate your sum insured, consider the cost of replacing what’s inside the building as well as the structure itself, including:

• Built-in wardrobes and shelving, light fixtures, ceiling fans and bathroom taps and showers
• Sheds, decking, fences and driveways

Insurance should also help to cover the cost of demolition, debris removal and professional fees such as architectural and engineering costs. 

One thing to be aware of: your insurance shouldn’t include the value of the land your property sits on. It’s more about being able to repair and rebuild should you have to. 

A quantity surveyor can help you figure out full replacement costs. You can start with the Insurance Council of Australia’s online building calculators if you don’t want to go that route.

Last but not least, what’s right today may not be right next year:

• Building costs creep up over time, and any renovations you make should be factored into your insurance
• Some insurers apply indexation, nudging your sum insured along with inflation, but this rarely keeps full pace with what it would actually cost to rebuild
• Every twelve months, take a look at your policy and update the figure if your circumstances have changed
• Let your property manager know when it’s time to do a review, so your cover stays up-to-date

Getting your sum insured right is worth revisiting as your property and the market change. A quick review each year is all it takes to keep your investment properly protected.