When you buy home insurance in Australia, you need to choose a sum insured for your building and your contents. This is the maximum amount your insurer will pay if your home or belongings are damaged or destroyed. What many people don’t realise is that in Australia, it’s the homeowner’s responsibility to get this number right.
Australia has experienced significant inflation and steep increases in construction costs over the past few years. According to the CoreLogic / Cordell Construction Cost Index (CCCI), residential construction costs grew by 3.4% in the 12 months to December 2024, and since the start of COVID-19, costs are up by around 30.8% (Property Council Australia, The New Daily). Despite this, many homeowners have not increased their sum insured to keep pace with rising rebuilding costs, leaving them exposed to underinsurance.
Too often, people only find out at claim time that they are underinsured, which can leave them tens or even hundreds of thousands of dollars out of pocket.
What is a sum insured limit?
When you take out a home insurance policy, your insurer will ask you to set a sum insured for both your building and your contents. The sum insured is the maximum amount your insurer will pay if your home or belongings are damaged or destroyed.
Here’s what each type of cover means:
- Building cover: This is about protecting the structure of your home itself. Your sum insured should cover the full cost of rebuilding your home from the ground up. That doesn’t just mean bricks and timber. It also includes demolition, debris removal, architects and engineers, compliance with today’s building codes, and expensive extras like removing asbestos if it’s found during demolition. Note some polices do include some additional benefits, but you need to read your PDS carefully.
- Contents cover: This is about protecting everything inside your home. A simple way to think of it is this: if you could pick up your house, turn it upside down, and shake it, everything that falls out is considered contents. Most Australian home insurance policies use a “new for old” basis. That means your sum insured should be enough to replace all your belongings with brand-new items at today’s prices, not second-hand value or what you originally paid years ago. One thing that often catches people out is that carpets are usually treated as contents in most policies, not part of the building. If you underestimate your contents cover and forget to include them, you may be left short at claim time. To avoid surprises, always read your insurer’s Product Disclosure Statement (PDS) carefully to see exactly how they define contents.
For example:
- If your home would cost $600,000 to rebuild but you only insure it for $400,000, your insurer will only ever pay $400,000.
- If it would cost $100,000 to replace your belongings but you only insured them for $50,000, you’ll have to pay the other $50,000 yourself.
Why so many Australians are underinsured
Underinsurance is very common in Australia, and it’s not surprising. Most people don’t work in construction and have little idea about what it really costs to rebuild a home. Materials, labour, demolition, and professional fees all add up quickly, and unless you’re in the building industry it’s understandable that you might underestimate these figures. Rising costs in recent years have only made this gap worse.
When it comes to contents, people often underestimate because they don’t realise how much “stuff” they actually own. It’s easy to think only of the big items like the couch, fridge, or TV, but once you start adding up clothes, kitchenware, bedding, and children’s toys, the value quickly climbs into the tens of thousands. Insurance is based on replacing everything new at today’s prices, and most of us don’t stop to imagine what it would cost to go out and buy it all again at once.
Many homeowners also forget to include demolition and hazardous removal costs, such as asbestos, when thinking about rebuilding. On top of that, some people deliberately choose a lower sum insured to save on premiums, but this creates a huge problem at claim time. Put simply, underinsurance is common because estimating the right cover is tricky, and it’s easy to overlook things, but getting it wrong can leave you badly out of pocket when you need your insurance most.
How to get your sums insured right
Here are some helpful tips to assist in determining your sum insured limit:
- Use trusted calculators
The Insurance Council of Australia (ICA) provides free building and contents calculators that use up-to-date cost data. You can use these tools to help you understand what sum insured will be right for you. Start here: insurancecouncil.com.au/consumers/calculators. - Write and document your rebuild estimate
Take the time to write down what you think it would cost to rebuild your home and keep a record of your estimate. Remember that the cost is not just bricks and mortar. You need to include demolition, debris removal, asbestos removal, and professional fees such as architects and engineers. Most of us are not builders, so talk to friends, family, builders, or others in your network to get a better understanding of what these costs look like in today’s market. This will give you a more realistic figure to base your sum insured on and help reduce the risk of being underinsured. - Create a contents list
Go room by room and note down what it would cost to replace each item brand new. Do not rely on sentimental or second-hand value, as insurers generally work on a new-for-old basis. Technology can also make this process easier. For example, by uploading photos of each room, ChatGPT can generate a list of your contents that you can then check and refine with today’s replacement prices. - Review every year
Renovations, new furniture, or expensive electronics can all mean your current cover is no longer enough. When your renewal notice arrives, take a moment to think about what has changed in your home over the past 12 months and update your policy to reflect these changes. Some policies also require you to notify your insurer as soon as changes occur, rather than waiting until renewal. To avoid any gaps in cover, make sure you are across your specific obligations by reading your insurer’s Product Disclosure Statement (PDS). - Ask an expert if unsure
If you are not confident in estimating the rebuild cost of your home, it is worth seeking professional help. Builders, valuers, and quantity surveyors can provide a detailed estimate that reflects current construction costs, regional variations, and any specific challenges your property may present, such as access issues or compliance with modern building codes. These professionals are experienced in factoring in all the hidden costs that homeowners often miss, including demolition, waste removal, asbestos handling, and professional fees. - Talk to an Insurance Broker
If you are unsure about how much cover you need, or you feel overwhelmed by the process, an insurance broker can be a valuable resource. Brokers work with a wide range of insurers and can help you understand how different policies define building and contents cover. They can also guide you through tricky details like whether carpets, floating floors, or window coverings fall under contents or building, which often catches homeowners out.
A broker’s role is to act in your best interests, not the insurer’s. They can review your situation, ask the right questions about your home, and help you choose sums insured that better reflect your actual needs. Many brokers also have access to professional tools, cost guides, and calculators that can provide a more accurate estimate of rebuild and replacement costs than a homeowner could work out on their own.
While using a broker may come with a fee or commission, the peace of mind in knowing your policy is correctly set up can outweigh the cost. If you are making big changes to your home, or if you simply want the reassurance of professional advice, speaking with a broker can be a smart step.
Final thoughts
Your home insurance sum insured is your financial safety net. In Australia, it is your responsibility to get it right. If you are underinsured, your insurer will not top it up for you, you will have to cover the difference yourself.
By using the ICA calculators, creating a detailed contents list (with AI help if you want to speed things up), and reviewing your policy regularly, you can protect yourself and your family from nasty surprises at claim time.
Disclaimer: Every insurance policy is different. The information in this article is general in nature and should not be taken as personal or financial advice. Always read your insurer’s Product Disclosure Statement (PDS) carefully and consider seeking professional advice to ensure your cover is right for your circumstances.