Home, life and car – make sure that you’re covered

Too many people underestimate the amount of insurance needed, and the consequences can be severe. Chiara Cavaglieri offers a guide

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You might like to think that just having insurance in place is enough, but before you tick home, car and life cover off the checklist, be aware you might have fallen foul of the underinsurance trap.

Inadequate home contents insurance is a common problem and this is often because people simply don't know what is and isn't covered. A new survey from Santander asked consumers to name their most treasured personal possessions; photographs topped the list for 24 per cent, followed by music collection and wedding or engagement rings. Despite this, one in five were unsure if their insurance actually covers their chosen possession and a further 14 per cent are without cover altogether.

Another big mistake is to underestimate the true value of your possessions – sometimes intentionally in the hope that this will bring premiums down. Misjudging the value of your contents can cause serious problems when you try to claim because many insurers use "averaging" clauses. For example, if you have £30,000 contents cover but find your possession are worth double at £60,000, many insurers will pay for only half of any claim, regardless of whether it is for less than £30,000.

"When considering the contents value of a property, policyholders should remember to include items in the garden and the shed, which can often add up to significant amounts, for example, expensive bikes and DIY equipment. Also, within the house itself, less obvious items such as clothes and children's toys are often overlooked, so make sure you include the value of these," said Alex Higgs, a home insurance expert at Confused.com.

Increasing the sum insured is relatively inexpensive; for a semi-detached house worth £200,000, for £20,000 of contents cover, with £5,000 of "high-risk" items, the average of the top five premiums is £64.13, according to Confused.com. If you want £40,000 cover, of which £10,000 is "high risk", it would cost £72.34.

When renewing or buying a new home insurance policy, start with an inventory; walk around your house and draw up a list of items, including the less obvious things such as clothing, ornaments, curtains and carpets. You need to calculate the cost of replacing them at today's prices, not the price you paid for them, so for any valuable items such as antiques, get an expert valuation.

If you are underinsured for buildings insurance, the shortfall could be even more crippling. The sum insured is the total cost of rebuilding your house, not the cost of buying another similar property, so use the online calculator at the Association of British Insurers (ABI) website (abi.bcis.co.uk). If your home has any unusual features, such as a thatched roof, use a professional surveyor instead. Any additions must also be divulged, such as extensions or if you have installed central heating.

The increased costs for better cover should be minimal. For the same semi-detached house worth £200,000, the average of the top five annual premiums with a rebuild value of £85,000 is £89.77. Pushing that rebuild value to £193,000 and the annual premium rises to £94.37 – a difference of £4.60.

Look out for policies that offer unlimited cover for both building and contents such as the Santander Peace of Mind Plus. Benefits include cover up to £10,000 per incident for contents temporarily removed from the home and single items worth up to £2,500 are covered without the need to add them individually on the policy – something that often catches people out.

"Cutting costs may seem a good idea, but can often be a false economy. You may end up paying more in the long run for not having enough cover," says Santander spokesman Andy Smith.

You may also be at risk of undervaluing yourself when taking out life insurance. Most people calculate the sum assured by considering their debts and set up their policy so that cover is reduced as their mortgage gets paid off. However, the same people will often forget to review their cover when they enter a new relationship or have children.

A generous payout might not cost as much as you think. Figures from Confused.com show that for a 32-year-old male non-smoker, level term life insurance would cost from £5.32 per month, for £100,000 cover, but he could buy £200,000 cover for £8.77 – adding only £3.45 to the monthly premium. Using this example, if a claim was made after 10 years, opting for the higher level cover would have cost an extra £414 but he would get an extra £99,500 payout.

Car insurance is a legal requirement. This is partly why it's so tempting to scrimp on the level of cover, but as with home and life cover, cutting back is counterproductive.

Even a fully comprehensive policy might not give as much protection as you hope. Not all policies cover your vehicle outside the UK, for example. One sneaky clause is that if you drive your own car for work purposes, you must have business-use cover.

Modified cars can also be a snag and even something as innocuous as a child car seat could be a potential pitfall. Defaqto figures show that almost half of policies do not offer any separate cover for car seats and of those companies that do, 35 per cent cover only up to £100 per seat.

"If you do not declare any modifications you may have made to your vehicle then the insurer will only offer you the car's original market value," says Mike Powell of Defaqto.

Third-party-only cover should be the cheapest option because it offers the lowest level of cover, but it can be the most expensive. This is because insurers assume that if you opt for this level of cover you have a "riskier" profile, such as a young driver or someone with convictions.

For a female aged 29, driving a 1 series BMW worth £8,000, annual premiums for fully comprehensive cover average £288.58. In comparison, the average of the top annual premiums for third party, fire and theft is at £332.45. You could pay less for more protection and rest easy in the knowledge that, should the worst happen, you've got it covered.

Expert view: Mike Powell, Defaqto

"People need to think about their sum insured very carefully – and don't underestimate what your valuables are worth. For example, think about what's in your wardrobe, even your freezer – it all adds up. Consider individual items of value and check that the policy limits are high enough to cover these."