Insurance Giant Warns about Proper Home Cover

May 31 - Picture this scenario. You purchase a property and take out household insurance on it. Over the years, you make some changes to the structure, add a new room, put in a new kitchen and landscape the garden.

Five years later, the house is destroyed in a fire. While your initial reaction may be one of relief that you thought to take out household insurance in the beginning, you may be in for an unpleasant shock.

If you didn't upgrade your home insurance policy over the years to match the value of the property, you will find that you will only be paid out for the proportion of the value that you had covered.

The Managing Director of Alexander Forbes Insurance, Gari Dombo, said that this would "leave you to make up the difference between what your insurer will pay and the full cost of restoring your house in the event of disaster."

Dombo also said that "the market value of your property, or what it can be sold for, has no bearing on what it might actually cost to rebuild."

In a nutshell, the sum insured should including a number of factors, and should take into account the cost of escalation in building material, inflation, and what it would cost to rebuild all the structures on the property (including sheds and garages) from scratch.

Calculations to upgrade the insurance policy should be done each year anew as if "the original base sum insured is incorrect, the new sum insured will still be incorrect after factoring in inflation."

Bond holders should also take a careful look at what their homes have been insured for to ensure that they are properly covered.