Insurance is not a set-and-forget affair; it requires regular attention to ensure your property is adequately protected. For building insurance, an annual review is generally recommended. This frequency allows you to adjust your coverage in line with changes in construction costs, property improvements, or alterations in your financial situation.
Under your building insurance policy, you are covered for the cost of rebuilding your property in the event of a disaster. However, construction costs can fluctuate due to factors like inflation, changes in material costs, and updated building codes. If your coverage doesn't reflect these changes, you risk being underinsured.
A common misconception is that once you've set your insurance, you're protected indefinitely. However, neglecting to review your coverage can lead to significant gaps, especially if you've made renovations or if the market value of your property has increased.
To see how this plays out, consider a practical example. Imagine you own a 3-bedroom home in Melbourne, valued at $900,000. You initially insured it for this amount. Over the last year, construction costs in the area have increased by about 5%. Without adjusting your insurance, you could be underinsured by $45,000. At a 37% marginal tax rate, the shortfall could cost you approximately $16,650 in tax-deductible losses if you need to rebuild.
In our experience reviewing thousands of properties across Australia, we've noticed that investors often overlook the impact of small renovations on their insurance needs. Adding a new deck or upgrading the kitchen can significantly increase the replacement cost of a property. Another common oversight is failing to update coverage after a significant market value increase, which can happen rapidly in a hot property market.
The answer can differ depending on your situation. If you have made significant renovations or upgrades, you should review your insurance immediately after completion. Properties in high-risk areas, such as those prone to bushfires or flooding, might require more frequent reviews. Additionally, if you hold the property in a Self-Managed Super Fund (SMSF), you may have specific compliance requirements impacting your insurance.
While reviewing insurance can seem straightforward, it often involves complex calculations and considerations. A Chartered Quantity Surveyor can provide a detailed assessment of your property's replacement cost, ensuring your insurance coverage is accurate and adequate. Working with your accountant can further refine this process, especially concerning tax implications.