Every question, every answer, every source

If you're thinking of reducing your house insurance sum insured to save money, the key question is: Would your insurance still cover the full cost of rebuilding your home if it were completely destroyed?

In New Zealand, it's possible to insure your house for too little without realising it. The amount you could sell your house for isn't necessarily the amount it would cost to rebuild it, and the cost of rebuilding can be significantly higher than you might expect.

The good news is that you can take some practical steps to work out whether your current sum insured is reasonable and whether there's room to reduce it without taking on too much risk.

1. Understand what your sum insured needs to cover

Your house sum insured should generally cover the cost of rebuilding your home, rather than its market value.

Depending on your policy, that may include:

• Demolition and debris removal: Clearing the damaged building and disposing of the rubble.
• Rebuilding the house: Materials, labour and construction costs.
• Professional fees: Architects, engineers, surveyors and other specialists.
• Council requirements: Building consent, inspections and compliance with applicable building regulations.
• Site-specific costs: Difficult access, sloping land, retaining walls or other features that make rebuilding more expensive.
• GST: Make sure the estimate accounts for GST where applicable.

The precise coverage depends on your policy, so check which costs are included in your sum insured and which are covered separately or subject to limits.

Also, your house policy may cover other structures or features, such as garages, decks, sheds and certain retaining walls. Check whether these are included in the building sum insured or need separate consideration.

One important distinction: Your land generally doesn't need to be included in the house sum insured because you're insuring the building, not the land itself.

2. How to tell if your sum insured is too low

There isn't one universal figure that's right for every house. However, there are several warning signs that your cover might be inadequate.

Warning sign 1: Your sum insured is lower than a rebuild estimate

This is the most useful test.

Use an online rebuild-cost calculator, such as the Cotality Sum Sure calculator, or the calculator recommended by your insurer.

You'll generally need details such as:

• Your home's floor area in square metres.
• Its age, construction type and number of storeys.
• The quality of its fittings and finishes.
• Any garage, decks, outbuildings or other structures.
• The slope and accessibility of your section.
• Any unusual features, such as extensive retaining walls.

Compare the estimated rebuild cost with your current sum insured.

For example, suppose your current cover is $700,000, but a rebuild calculator estimates that rebuilding your home would cost $850,000.

Item	Amount
Current sum insured	$700,000
Estimated rebuild cost	$850,000
Potential shortfall	$150,000

In this example, you'd be $150,000 short before allowing for any further increases in building costs.

You would need to find that extra money yourself if the rebuild cost exceeded the amount your policy would pay.

This is why the Insurance Council of New Zealand recommends reviewing your sum insured regularly and considering more than one method of estimating the rebuild cost. ICNZ guidance.

Warning sign 2: You're basing it on your home's market value

This is a common mistake.

For example, imagine your house has:

• A market value of $900,000.
• Land worth $450,000.
• A current sum insured of $500,000.

It might seem that $500,000 is plenty because it's more than the difference between the market value and the land value.

But that calculation doesn't necessarily work. The cost of rebuilding a house isn't the same as its depreciated value or its contribution to the property's market price.

The rebuild cost could be higher or lower than $500,000, depending on the building itself and the cost of construction.

Don't reduce your sum insured simply because your house's market value has fallen. Instead, establish what it would cost to rebuild.

Warning sign 3: Your house has features that are expensive to replace

Be particularly careful about reducing cover if your property has:

• A large floor area or multiple storeys.
• High ceilings, extensive glazing or a complicated roof.
• Premium kitchens, bathrooms or bespoke fittings.
• Architectural features or unusual construction materials.
• Steep access, a sloping site or substantial retaining walls.
• Detached garages, sleepouts or other buildings.

A standard online calculator might not accurately account for all these features.

If your home is architecturally designed, unusually large or expensive to build, consider getting a quantity surveyor or another suitably qualified professional to estimate the rebuilding cost.

Warning sign 4: You haven't updated your sum insured recently

Your house might have the same floor area as it did five years ago, but rebuilding it could cost more today.

Construction costs, labour, professional fees and regulatory requirements can change over time.

Similarly, if you've renovated your kitchen, added a bedroom or built a garage, your previous sum insured might no longer be appropriate.

Don't assume that an automatic increase applied by your insurer at renewal guarantees that your cover is sufficient.

Your insurer may not know about improvements you've made, and an automatic adjustment might not accurately reflect your home's actual rebuilding cost. NZI's explanation of sum insured.

---

3. What happens if you insure your house for too little?

This is the risk to understand before making a decision.

With a typical sum-insured policy, the insurer's liability for a total loss is generally capped at the amount specified in your policy, subject to its terms and conditions.

Let's say your house is insured for $600,000, but the actual cost of rebuilding it after a major fire is $800,000.

You could face a $200,000 shortfall.

That might mean:

• Contributing your own savings to complete the rebuild.
• Borrowing money.
• Building a smaller house or using less expensive materials.
• Selling the property if you cannot afford to rebuild.

There is an important qualification here: the precise outcome depends on your policy. Some policies offer additional protection for certain events, such as fire, even when the normal sum insured is exceeded. Others have special limits or conditions for natural disasters.

Check your policy wording rather than assuming that all events are covered in exactly the same way.

Also, don't assume that being slightly underinsured will result in the insurer paying a proportional share of every claim. The effect depends on the policy terms and the type and extent of the loss.

The key question is whether you could manage financially if you had to pay a substantial amount towards rebuilding your home yourself.

4. How to reduce your premium without taking too much risk

If your premiums have become expensive, I wouldn't start by lowering the sum insured.

I'd take these steps in order.

Step 1: Establish a realistic rebuilding cost

Use a reputable calculator and check the information you enter.

If the estimate is significantly below your existing sum insured, investigate why before making any changes.

You might find that your current cover is unnecessarily high. Alternatively, you might discover that your current cover is already too low.

Either way, you'll be making a decision based on evidence rather than guesswork.

Step 2: Ask your insurer for quotes at different sums insured

Once you have a reasonable rebuild estimate, ask your insurer to quote for your current sum insured and a couple of alternatives.

For example:

Sum insured	What to investigate
$850,000	Your current level of protection
$800,000	Whether a modest reduction produces a worthwhile saving
$750,000	The additional saving and the increased risk of a shortfall

These figures are illustrative only. The appropriate amounts for your house will depend on its estimated rebuild cost.

Ask your insurer to explain how much you would save annually at each level.

You might discover that reducing your cover by $100,000 only saves you a relatively small amount each year. If so, taking on the risk of a six-figure shortfall might not be worthwhile.

Step 3: Consider changing your excess

Your excess is the amount you agree to pay towards an eligible claim.

Depending on your insurer and policy, choosing a higher excess might reduce your premium without reducing the maximum amount available for a major rebuild.

However, only increase your excess to an amount you could comfortably afford to pay if you needed to claim.

Ask for quotes at different excess levels and compare the savings with the additional out-of-pocket cost you'd face when making a claim.

Step 4: Compare other insurers

Different insurers can charge quite different premiums for similar properties.

Compare not just the price, but also:

• The sum insured and how it is applied.
• Whether fire and natural disaster claims have different limits.
• Cover for retaining walls, fences, garages and other structures.
• Temporary accommodation limits.
• Policy excesses and exclusions.
• Any additional benefits or special conditions.

Consumer NZ's house and contents insurance guide is a useful starting point for understanding the differences between policies.

A cheaper policy with a suitable sum insured could be a better option than keeping your existing policy and reducing the amount of cover.

---

5. My recommended approach

If you were looking to reduce your sum insured, I'd use this simple rule:

Don't reduce your cover below a reasonable estimate of the total cost of rebuilding your home, including the additional costs that your policy requires you to include.

I'd also allow for the possibility that building costs could rise between now and the time you might need to rebuild.

You don't necessarily need to choose an enormous safety margin. You do need to understand how your estimate was calculated, what it includes and what could make the actual cost higher.

If you are already struggling with the premium, it is worth discussing the problem with your insurer or broker. You may be able to find a more affordable arrangement without accepting an excessive rebuilding risk.

---

Let's work out whether your current cover might be too high

I can help you assess whether your existing sum insured looks reasonable and whether reducing it is worth investigating.

What is your current house sum insured, and approximately how big is your house in square metres?

If you know them, it would also help to know:

• Whether it's a standard house or an architecturally designed home.
• Whether it's single-storey or two-storey.

With those details, we can make a more meaningful initial assessment of whether your current cover appears reasonable, potentially excessive or worth checking more carefully.