Average is not good enough

There is a tiny loophole in all short term insurance contracts. In normal times it is not worth worrying about. In times like these it is crucial. Let me explain.

Assume that your home costs R1-million to rebuild. When you bought it three years ago it cost R500,000. Your insurer will increase the cover on your home by 10% each year. That means that after 1 year your premium rises a little and your home is covered for R550,000. The next year that rises to R605,000. And after the most recent year, your home is insured for R660,500. (that’s a long way short of R1 million.)

There is nothing wrong with that. At least, not until something goes wrong. Maybe it’s a fire, or maybe a flood, but let’s look at what happens now if your home is destroyed.

The loophole is called ‘AVERAGE’. This means the following.

When you put in your claim for R400,000 damage, the insurer will point out that you did not really insure your whole home. You only insured 66% of your home. (It was worth R1 million, but you insured just R660,500.)

That means that they only have to pay out 66% of your claim, and 66% of R400,000 is R264,000, leaving you to pay R136,000 towards repairs.

If you had a total loss, your R660,500 leaves you under-insured by R339,500, which you will have to meet yourself. Heck, given the market of the past few years, the chances are strong that you still owe more than that on the bond!

As I said, this is not a problem in normal times. But the recent past has not been normal, and the good news is that home building prices went skyward until a year or so ago. The bad news is that most of us are badly under-insured, and if something happens now the Insurer will not pay out what you expect or need.

Please don’t feel alone. If your home is worth less than R1.5 million, then you are in the same leaky boat as 86% of all home owners who are insured for only 45% of the correct value. If your home is worth more R1.5 million, then your sum insured is likely to be only 55% of the correct value.

The same rules apply to contents. The sum insured must be the cost of buying new contents of the same quality.

Yet 78 of every 100 people are only covered for 39% of the true value of their contents.

This means that on a R50,000 claim, they will only get R19,500

from insurers. They need to pay R30,500 themselves!

So, when you choose your sums insured do not think of your lounge suite as 10 years old, and worth nothing. What will it cost to replace it?

Part of the problem is that we forget what we have hidden in our houses. Out of sight is out of mind, which leads to out of pocket.

If you would like a form to help you work out the right sum insured, go here, and work through it valuing each item at its new price. The results should be startling.

Phil Cooper is a long standing Business Warrior and friend. It was his suggestion I tell you about this problem. Chances are good that nobody else will.

And another banking tale of woe…

A while back one of my clients called in a panic. The story is…

He had a R50,000 overdraft with one of the big four banks.

He had deposited a large cheque from one of his clients.

Then he had written out cheques to all his own suppliers. The incoming cheque bounced. As his suppliers deposited the cheques he had given them, this caused a sudden, startling extension of his overdraft. So his bank bounced twenty little outgoing cheques. (Yes, they could have bounced four bigger cheques, but the cheques arrived in the wrong order, I am told. )

He scrambled to gather enough incoming cash to get his account back to zero so that he could re-issue the outgoing cheques.

They bounced again. This time because his bank had cancelled his overdraft because he had written so many bad cheques. (Maybe they waited a few days for him to get his account back in line, but his overdraft was repayable on demand (as is yours), and the best time to demand repayment is when there is nothing owing.

As his cheques to suppliers started to bounce again he tried to open a second bank account to regain control. Problem is that his new bank wanted proof from his old bank that he had not bounced cheques in the past twelve months…

Since I started teaching the CrashProof principles in 1995 I have heard a variant of this story every few months. The golden rule: Your overdraft is not your friend. There are better, safer, and cheaper ways to borrow money.

I’d like to share a set of tactics that will slash your risks and costs and your banker will love you for it.

Please Check out the CrashProof your Business course here.