Understanding your property insurance excess in New Zealand is crucial for managing costs and making informed decisions about your coverage. The excess is the amount you pay out of pocket when you make a claim, and selecting the right excess level can significantly impact your premiums and overall financial risk. This guide explains everything you need to know about excesses, how they work, and how to choose the right one for your situation.
What is a Property Insurance Excess?
Simply put, the excess is the first portion of any claim that you’re responsible for paying. It’s the agreed-upon amount you contribute before your insurance policy kicks in to cover the remaining costs. Different insurance companies in New Zealand offer various excess options, allowing you to tailor your policy to your budget and risk tolerance. This concept is common across different types of insurance, but we’re focusing specifically on property insurance here.
How Does the Property Insurance Excess Work?
Imagine your home sustains damage during a storm, resulting in repair costs of $10,000. If your policy has an excess of $500, you will pay $500 towards the repairs, and your insurance company will cover the remaining $9,500. This keeps premiums affordable for everyone and ensures policyholders take some responsibility for minor damages. You only pay the excess amount if you make a claim that’s covered by your insurance.
Types of Excesses in New Zealand Property Insurance
Understanding the different types of excesses is key to choosing a policy that suits your needs. While many policies offer a standard excess, others include specific excesses for particular situations. Here are some common types:
- Standard Excess: This is the most common type and applies to most claims. It’s a fixed amount (e.g., $500, $750, or $1000) that you pay regardless of the type of covered event.
- Voluntary Excess: Some insurers offer a voluntary excess, which allows you to choose a higher excess amount than the standard option. Increasing your voluntary excess can lower your premium because you’re taking on more of the risk.
- Involuntary Excess: This is an excess imposed by the insurer due to specific circumstances relating to your property or risk profile. For instance, older homes, homes with known issues like leaky cladding, or properties in high-risk areas might be subject to an involuntary excess.
- Specific Excesses: These apply to certain types of claims, such as those related to earthquake, water damage, or theft. For example, you might have a standard excess of $500 for most claims, but a higher excess of $2,000 for earthquake damage. Checking your policy wording carefully is essential to understand these specific excess types.
Factors Affecting Your Property Insurance Excess
Several factors influence the excess options available to you and the impact on your premium:
- Location: Properties in areas prone to natural disasters, like earthquakes or floods, may have higher excesses or limited excess options. For example, homes in Wellington, which is known for its seismic activity, may have higher earthquake excesses.
- Property Type & Age: Older houses or those with specific construction materials (e.g., homes with asbestos or monolithic cladding) might have higher excesses due to the increased risk of damage or the difficulty of repairs.
- Claims History: If you’ve made frequent claims in the past, your insurance company might increase your excess or offer fewer options. A history of claims indicates a higher risk profile.
- Policy Options: Comprehensive policies generally offer a wider range of excess options than basic policies. This allows you to fine-tune your coverage based on your specific needs and budget.
How to Choose the Right Property Insurance Excess
Selecting the ideal excess amount is a personal decision that depends on your financial situation, risk tolerance, and claims history. Here’s a step-by-step approach to help you make the right choice:
- Assess Your Financial Situation: Determine how much you can comfortably afford to pay out of pocket in the event of a claim. Consider your savings, emergency fund, and other financial obligations. If you have limited savings, a lower excess might be preferable, even if it means paying a higher premium.
- Evaluate Your Risk Tolerance: Think about how likely you are to make a claim. Do you live in a relatively safe area, or are you exposed to higher risks like earthquakes, flooding, or burglary? If you live in a region with low risk of natural disasters, you might opt for a higher excess.
- Compare Premiums and Excess Options: Get quotes from several insurance companies with different excess levels. Calculate the long-term cost savings of a higher excess versus the potential out-of-pocket expense in case of a claim. This is best done with a detailed comparison spreadsheet to visually see the differences.
- Consider Potential Claim Scenarios: Think about the types of claims you’re most likely to make. For example, if you’re concerned about water damage, investigate excess options specifically for this. Are there specific excesses that apply to certain claim types?
- Read the Policy Wording Carefully: Before making a decision, carefully review the policy wording to understand all the terms and conditions associated with the excess. Pay close attention to any specific excesses that apply to certain types of claims. Many people skip this step, but it’s vital.
The Impact of High vs. Low Excesses
The excess level you choose has a direct impact on your insurance premium. It’s essentially a balancing act between your upfront cost (premium) and your potential out-of-pocket expense (excess) when making a claim.
High Excess
Pros:
- Lower Premiums: Opting for a higher excess significantly reduces your annual insurance premium because you are bearing a larger portion of the risk. For instance, increasing your excess from $500 to $1000 could save you several hundred dollars per year.
- Discourages Small Claims: A high excess might deter you from making small claims, which can help you maintain a clean claims history and potentially avoid future premium increases.
Cons:
- Higher Out-of-Pocket Costs: If you need to make a claim, you’ll have to pay a larger sum upfront. This can be a significant financial burden, especially if you’re on a tight budget.
- May Not Be Suitable for All: Those with limited savings might find it difficult to afford a high excess in the event of a claim.
Low Excess
Pros:
- Lower Out-of-Pocket Costs: In the event of a claim, you’ll pay a smaller amount upfront. This can be especially helpful for those with limited savings.
- Encourages Claims for Even Minor Damage: A low excess means you’re more likely to claim for small damages, knowing your contribution will be minimal.
Cons:
- Higher Premiums: You’ll pay a higher annual premium for the lower excess because the insurance company is taking on more risk.
- Potential for Premium Increases: Making frequent claims, even for small amounts, could lead to increased premiums in the future.
Real-World Examples and Case Studies
To illustrate the impact of excess choices, let’s consider a few real-world examples:
Case Study 1: Earthquake in Christchurch Sarah lives in Christchurch and owns a house valued at $600,000. She has two insurance options: Policy A with a standard excess of $500 and an earthquake excess of $1,000, or Policy B with a standard excess of $1,000 and an earthquake excess of $2,000. Policy A costs $1,500 per year, while Policy B costs $1,200 per year. In the event of a significant earthquake causing $50,000 worth of damage, Sarah would pay $1,000 with Policy A or $2,000 with Policy B. However, over ten years, she would save $3,000 ($300 per year x 10 years) in premiums by choosing Policy B. Sarah needs to weigh the potential savings against the higher out-of-pocket cost in case of an earthquake claim. Because of the city’s earthquake history and risk, many homes there have higher excess rates for this specific type of damage.
Case Study 2: Water Damage in Auckland Mark lives in Auckland in a modern apartment. He discovers a leak in his ceiling causing $3,000 of damage. He has an excess of $750. He pays the $750 excess, and the insurance company pays the balance of $2,250 to cover the repair costs. If Mark had chosen a lower excess, his premium would have been higher, but his out-of-pocket expense would have been lower. If he never made a claim for several years, he may have regretted not opting for the higher excess and benefiting from lower premiums during that time.
Case Study 3: Theft in Wellington Emily lives downtown in Wellington, and a burglary occurs at her home, resulting in $2,000 in stolen goods. She has an insurance policy with a standard excess of $500. After reporting the theft to the police and submitting a claim, she pays the $500 excess, and her insurance covers the remaining $1,500 of the loss. Had Emily chosen a lower excess, her yearly payments to the insurance company would have been higher.
Tips for Minimizing Your Property Insurance Excess
While you can’t eliminate your excess entirely, there are strategies to minimize its impact:
- Maintain Your Property: Regularly maintain your property to prevent damage and reduce the likelihood of needing to make a claim. Simple tasks like clearing gutters, fixing leaky taps, and trimming trees can go a long way in preventing costly problems.
- Improve Home Security: Installing security measures like burglar alarms, security cameras, and reinforced doors can deter theft and reduce your risk profile, potentially leading to lower excesses or better coverage options.
- Bundle Your Insurance: Some insurance companies offer discounts if you bundle your property insurance with other policies, such as car or contents insurance. These discounts can help offset the cost of a lower excess.
- Shop Around and Compare Quotes: Always compare quotes from multiple insurance companies before making a decision. Different insurers offer varying excess options and premium rates, so shopping around can help you find the best deal.
- Consider a Loyalty Discount: Staying with the same insurance company for an extended period can sometimes earn you loyalty discounts, which can help reduce your premium and make a lower excess more affordable.
Navigating the Claims Process with an Excess
Understanding the claims process and how the excess applies is crucial when you need to make a claim:
- Report the Incident: As soon as possible after the incident, report the damage or loss to your insurance company. Provide them with all the necessary details, including photos, videos, and any supporting documentation, such as police reports.
- Assess the Damage: The insurance company will typically send an assessor to evaluate the damage and determine the extent of the loss. They may also request quotes from contractors for the repair work.
- Pay Your Excess: Once the claim is approved, you’ll need to pay your excess amount. This is usually done before the repair work begins or before you receive payment for the loss. Some insurers may deduct the excess from the total claim payment.
- Review the Settlement Offer: Carefully review the settlement offer from the insurance company to ensure it covers all the necessary repairs or replacements. If you have any concerns or disagreements, discuss them with the insurer.
- Complete the Repairs or Replacements: Once you’ve agreed on the settlement, you can proceed with the repairs or replacements. Follow the insurance company’s guidelines and ensure all work is completed to a satisfactory standard.
When is it Best to Change Your Excess?
Your insurance needs can change over time, so it is worthwhile re-evaluating your excess every few years, or when your circumstances change
- Change in Financial Status: If your financial situation improves or deteriorates, it might be time to reassess your excess. If you have more savings, you could opt for a higher excess to lower your premiums. Conversely, if your income decreases, a lower excess might provide more financial security.
- Moving to a New Location: If you move to a new area with different risk factors (e.g., moving from a low-risk to a high-risk earthquake zone), you might need to adjust your excess accordingly.
- Renovating or Upgrading Your Home: When you make significant improvements to your home, such as adding an extension or installing a new kitchen, it’s wise to review your insurance coverage and excess. The increased value of your home might warrant a different excess level.
- Life Changes Affecting Risk: If there are changes in household occupants – children moving out, tenants moving in – your risk profile and therefore the suitability of your excess, may change.
Understanding No-Excess Options
While not as common, some insurance providers offer “no-excess” policies. This means you don’t have to pay anything out-of-pocket when you make a claim. However, these policies typically come with significantly higher premiums. It’s essential to weigh the cost of the higher premium against the potential savings on the excess before opting for a no-excess policy. In certain situations, particularly when very small claims happen, no-excess policies could make more sense, depending on individual choices.
Common Mistakes to Avoid When Choosing an Excess
Avoid these common pitfalls when selecting your property insurance excess:
- Choosing an Excess Solely Based on Price: While cost is important, don’t choose the lowest premium without considering the potential out-of-pocket expense in case of a claim. Think about the overall value and suitability of the policy to your needs.
- Not Understanding the Policy Wording: Carefully read the policy wording to understand all the terms and conditions associated with the excess, including any specific excesses that apply to certain types of claims.
- Ignoring Your Risk Profile: Don’t choose an excess that’s too high for your financial situation or risk tolerance. Consider the likelihood of making a claim and your ability to afford the excess amount.
- Failing to Shop Around: Get quotes from multiple insurance companies to compare excess options and premium rates. Don’t settle for the first quote you receive.
- Not Re-evaluating Your Excess Regularly: Your insurance needs can change over time, so it’s important to re-evaluate your excess periodically to ensure it still meets your needs.
FAQ Section
Here are some frequently asked questions about property insurance excesses in New Zealand:
What happens if the damage is less than my excess?
If the cost of the damage is less than your excess, you’ll be responsible for paying the entire amount yourself, and you won’t be able to make a claim.
Can I change my excess mid-term?
In most cases, you can change your excess when you renew your policy. Some insurers may allow you to change it mid-term, but this is usually subject to certain conditions.
Is the excess payable for each claim?
Yes, the excess is payable for each separate claim you make. For instance, if hailstorm and then a week later your hot water cylinder leaks, each claim will trigger your excess requirement.
Does the excess apply to third-party claims?
Yes, the excess applies to third-party claims, meaning instances where you accidentally cause damage to a neighbour’s property. You will still pay your excess.
What if I can’t afford to pay the excess?
If you can’t afford to pay the excess, you won’t be able to proceed with the claim unless you can arrange alternative financing.
Is a lower excess always better?
Not necessarily. A lower excess means higher premiums. It’s about finding the right balance for your financial situation and risk tolerance.
How does earthquake commission (EQC) play a role with insurance excesses?
The Earthquake Commission (EQC) provides natural disaster insurance for residential properties. The EQC will pay out for specific natural disasters, with a portion of the claim handled by your insurer. If the damage surpasses the EQC cap, your insurance policy kicks in, and then the standard excess rules would apply.
Does GST apply to property insurance excesses?
No GST (Goods and Services Tax) is not charged on property insurance excesses in New Zealand.
Are excess options always available?
Property owners may not always have access to any excess options. Properties that are known for high risk, such as landslide zones, may be imposed with a higher fixed excess without any ability to make changes.
How often should review my insurance excess?
Aim to review your excess amount at least once a year, or any time your personal or financial factors change.
References
Insurance Council of New Zealand.
Consumer Protection New Zealand.
Earthquake Commission (EQC).
Take control of your property insurance! Don’t leave it to chance. Review your current policy and excess options today to ensure you’re adequately protected. Get quotes from multiple insurers, compare the options carefully, and choose a policy that aligns with your financial situation and risk tolerance. Securing the right property insurance isn’t just about protecting your assets; it’s about providing peace of mind. Start now and avoid potential financial headaches down the road!
