Approximately 60% of Australian homes are underinsured. The median gap between what households are insured for and what it would actually cost to rebuild is around 34%, which translates to roughly $150,000 to $200,000 on a median policy. In a total loss — fire, flood, cyclone — that gap comes directly out of the owner's pocket, not the insurer's.
The sum insured is the single most important number on a home insurance policy. Here is how it works, why so many people get it wrong, and how to estimate it correctly.
The sum insured on a home insurance policy represents the maximum amount the insurer will pay to rebuild your home from the ground up following a total loss. It is not your home's market value. It is not what you paid for the property. It is the cost of demolishing the ruins, removing debris, and rebuilding to the same standard using 2026 materials and labour costs.
Market value and rebuild cost are often significantly different. A house in an inner-city suburb might sell for $1.5 million but cost $700,000 to rebuild. A house in a regional area might sell for $400,000 but cost $500,000 to rebuild, because construction costs in regional areas are higher per square metre than the local land market would suggest. Insuring to market value does not fix the underinsurance problem — it often makes it worse.
The question to answer is: how much would it cost to demolish what remains, cart away the rubble, and rebuild the same house from scratch using today's labour and materials prices? That is your sum insured.
A full rebuild cost estimate includes more line items than most homeowners expect. The major components are: demolition and debris removal (typically $15,000 to $50,000 for a standard home), architect and engineering fees if required by council (5 to 10% of build cost), council approval and inspection fees, the cost of the structural build itself (walls, roof, flooring, windows), all fixtures and fittings including kitchens, bathrooms, and built-in wardrobes, and in some cases compliance upgrades that did not exist when the home was originally built but are now required by current building codes.
Construction costs in Australia have increased substantially since 2020. The ABS Producer Price Index for house construction rose over 30% between 2020 and 2024, driven by materials costs and a sustained shortage of trades. A sum insured figure set in 2019 or 2020 and not reviewed is likely significantly below current rebuild cost.
There are three main reasons. First, when you set up a policy, the insurer asks you to nominate a sum insured or provides a default figure based on limited inputs. Most people do not have the information to estimate rebuild cost accurately, so they either guess low, accept the insurer's default, or use purchase price as a proxy — all of which tend to understate the actual number.
Second, policies are typically renewed annually with automatic indexation of around 3 to 5%. This indexation is better than nothing but typically tracks general CPI rather than construction cost inflation, which has run well above CPI in recent years.
Third, people add to their homes — renovations, extensions, new kitchens, decks, sheds — and do not update their sum insured to reflect what they have added. A $50,000 renovation that was not declared increases the rebuild cost but does not automatically increase coverage.
Use an online calculator as a starting point. The Housing Industry Association (HIA) and CoreLogic both publish residential rebuild cost calculators. These take inputs including floor area, construction type, number of storeys, location, and finish quality to produce an estimate. These tools are a better starting point than using market value or purchase price.
Check the floor area. Rebuild cost calculators use cost per square metre, so getting the floor area right matters. Measure the external footprint of your home. Include the garage, covered alfresco areas, and any second storey.
Adjust for renovations. If you have renovated since you set the policy, estimate what the renovation cost and add that to your baseline estimate.
Get a quantity surveyor report if the stakes are high. For high-value homes, heritage-listed properties, or homes with unusual construction, a professional quantity surveyor report ($300 to $800) provides a defensible rebuild cost estimate. This is particularly relevant if you would struggle to fund any gap between your coverage and the actual rebuild cost.
When you claim a total loss and your sum insured is below the actual rebuild cost, you bear the difference. If your home is insured for $600,000 and the actual rebuild cost is $850,000, the insurer pays $600,000 and you fund the remaining $250,000 from savings, redraw, or additional borrowing — or you rebuild a smaller home than the one you lost.
For partial losses, the situation is less obvious but still damaging. Some policies apply a proportionality clause: if your sum insured is only 70% of the actual rebuild cost, the insurer may pay only 70% of the partial claim cost, not the full amount. This is disclosed in the PDS but rarely noticed until claim time.
| Sum insured | Actual rebuild cost | Shortfall |
|---|---|---|
| $500,000 | $700,000 | $200,000 |
| $600,000 | $850,000 | $250,000 |
| $800,000 | $1,100,000 | $300,000 |
Some insurers offer "total replacement" or "guaranteed rebuild" policies where the insurer commits to rebuilding your home to its previous standard regardless of cost, without a nominated sum insured. These policies remove the underinsurance risk but are more expensive and less widely available than sum insured policies. Confirm what "total replacement" actually means in the PDS — some policies use this language but retain conditions or caps that limit the coverage in practice.
At a minimum: annually at renewal, and immediately after any renovation, extension, or significant improvement. The review should take 15 minutes using a rebuild cost calculator and is meaningfully more useful than reviewing the premium. The premium difference between accurate and underinsured coverage is often small; the financial consequence of getting it wrong is not.
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