Car, home and contents: insurance basics

Strip away the branding and every general insurance policy is the same machine. You pay a premium — the recurring price of the cover — and the insurer promises to pay when a defined list of events happens, capped by a sum insured — the most the policy will ever pay out — and reduced by an excess, which Moneysmart defines as simply the amount you pay when you make a claim. The full text of that promise lives in the product disclosure statement (PDS) — the document spelling out what is and isn't covered, and on what conditions. The PDS is the policy; everything else is advertising.

Car insurance is the cleanest demonstration that "insured" is not one thing. Moneysmart's tiers run from compulsory third party — cover for injuries to people caused by your car, but not damage to cars or property — through third party property damage, which covers other people's cars and property but not your own car, and a fire-and-theft variant that adds your car being stolen or burnt, up to comprehensive: damage to your car and other people's, even when the accident was your fault, plus theft, fire and weather. Four products, one word, wildly different promises.

Comprehensive cover then splits again on what a written-off car is worth. Agreed value is a fixed payout you and the insurer settle in advance — a higher premium buys a known number, though the insurer may step that number down each year as the car ages. Market value is whatever the car would have sold for at the time of the accident, decided by the insurer from industry data. The same choice — pay more for certainty, or less for an estimate made later — echoes through home and contents policies too.

The excess is the most under-used dial on any policy. Moneysmart's car and contents guides make the trade explicit: the higher your excess, the lower your premium — you can save on the ongoing price by agreeing to pay more of any claim yourself. Setting the excess is really drawing a line: below it, losses are your problem; above it, they're mostly the insurer's. Most people leave the line wherever the default quote happened to put it.

Drawn deliberately, that line is a strategy. A higher excess means you self-insure the small stuff — minor mishaps get absorbed by your own savings — while the premium saved is effectively a discount for keeping the cover pointed at losses that could genuinely sink you. That's insurance at its cleanest: the catastrophic belongs on the insurer's balance sheet, and the survivable is usually cheaper to carry than to insure. But the strategy has one load-bearing prerequisite: an emergency fund that can actually produce the excess on a bad day. A high excess with no buffer behind it isn't self-insurance — it's a gap wearing the name.

The excess also quietly decides which claims are worth making at all. Because the payout is what's left after the excess, a repair costing barely more than the excess recovers almost nothing — arithmetic worth running before every claim. Moneysmart's advice is to weigh the two directions honestly — higher premium with a low excess, or the reverse — and its renewal checklist adds the question people forget: is the excess still affordable this year? The dial resets at every renewal; it only helps if you turn it on purpose.

Underinsurance — cover that won't meet the full cost to rebuild, repair or replace what you've lost — is, on Moneysmart's telling, very common in Australia. For a house, the usual way in is one confusion: a home's market value includes the land, but insurance is about the rebuild cost — what it would take to put the structure back — and the two can be very different numbers. Rebuilding also drags in costs no sale price hints at: demolition, site clean-up, council fees, architects and surveyors, somewhere to live while it happens. Renovations push the number up, and inflation in building costs pushes it up again while you're not looking.

Contents run the same trap at smaller scale. Furniture, clothes, electronics and personal items add up quickly — the underinsurance page's exact warning — while intuition anchors on the few big visible things, not the hundreds of small ones. Two policy details then decide what a claim actually pays. New-for-old (replacement value) cover pays the full cost of replacing your things with new ones — the best cover, and dearer — where an actual-value policy pays only what the ageing item was still worth. And sub-limits cap certain categories regardless of your total: in Moneysmart's own example, if the policy's electrical-appliance limit is $1,000 and fire destroys your $2,000 television, the difference is yours. Jewellery and special collections like artwork or stamps may need cover decisions of their own, and portable items usually carry per-item caps.

The defence is unglamorous: check the sum insured against today's reality, not last year's renewal letter. Moneysmart's guidance is to review cover every year and after any renovation or big purchase, and to replace a number that sounds right with a calculated one — insurers' rebuild calculators and the Insurance Council of Australia's building and contents calculators exist for exactly this. The shortfall can even bite before a total loss: some policies carry an averaging clause that scales down partial claims when the sum insured sits well below the true cost. Underinsurance doesn't make a policy cheap — it makes the payout small, and tells you at the worst possible moment.

Two policies with the same name can be different promises, and the differences live in the exclusions — the things a policy does not cover. Moneysmart's home insurance guide is blunt that finding them means reading the PDS: its examples include damage caused by the sea, smoke, landslides or power failures, and it warns that even when flood is included, damage to some parts of the house may not be covered. Contents policies commonly leave out accidental damage unless you add it as an option, and may exclude theft when windows or doors were left unlocked. Comparing policies by their exclusions, caps and special conditions is slower than comparing prices. It's also the only comparison that matters.

The second failure mode is cover you never chose so much as accepted: add-on insurance, sold at the point of some other sale. The cautionary tale is consumer credit insurance — optional cover sold with personal loans, credit cards and some mortgages, promising to meet repayments if you lose your job, fall ill or die. ASIC's review of it found sales practices it called unacceptable, poor product design, and claims that returned only a small fraction of the premiums paid — so sellers now have to wait a few days after your credit is approved before offering it, and if they don't, you can cancel for a full refund. Before accepting any add-on, Moneysmart's checklist is blunt: check whether cover you already hold — income protection, contents — already does the job, whether you could actually claim given employment conditions and waiting periods, and what it really costs once premiums added to a loan start accruing interest. Point-of-sale extras are natural habitat for hidden costs.

The third failure is drift. Renewal is automatic; attention isn't. Moneysmart's renewal checklist amounts to re-running the whole decision once a year: is the sum insured still enough once inflation has moved rebuild costs, has the property changed, is the excess still affordable, have any exclusions or limits changed since last year, and would the same cover cost less elsewhere. Re-compare, don't just renew — and compare on cover before price, because the same guide carries the warning that undercuts bargain-hunting: the cheapest policy may not give you the cover you need.