How to check if you are underinsured

By Kate Saines

Insurance is supposed to provide us with peace of mind. Yet many of us spend thousands on different insurance products every year and will never reap the benefits.

One of the reasons for this is many of us are underinsured. As such, if we make a claim, we won't be able to receive a penny.

There are fears that the recent rise in Insurance Premium Tax (IPT) together with the 2.5 per cent increase in VAT will cause some people to consider reducing insurance cover.

Santander Insurance is warning people not to shift insurance into the 'optional extra' category of expenditure and consider the consequences should misfortune befall them.

We've taken a look at the three most common types of insurance – life, home and motor – and asked some of the insurance experts to tell us how you can make sure you are properly covered and getting your money's worth.

Home Insurance

Figures released last month by Direct Line show one in five of us have no insurance for our home contents and a quarter of people with policies in place are underinsured by £20,000.

While many people are ditching their contents insurance in a bid to save more pennies during the recession, this is not the only factor at play.

Andrew Morrell, head of home insurance at Direct Line, said it was far too easy to grossly underestimate the level at which your home insurance should be set.

An investigation by the insurer has found that many people – 39 per cent in fact – have not adjusted the value of their contents insurance to account for inherited heirlooms like jewellery or antiques.

And many just did not realise that cover on their home contents policy needed to be adjusted at all.

So, to ensure you are not underinsured, what do you need to do?

The first step, says Kris Coombes, an appraiser for Direct Line, is to make an inventory.

He said: "We suggest customers take the time to walk around their homes prior to renewal and consider the cost of replacing items at their current retail price.

"Spend an hour to an hour-and-a-half drawing up a list of items. Consider where you bought the item and where you could likely buy it again. For example, a sofa - was it bought at a retail store or was it specially made?"

It might sound like an arduous task but Mr Coombes reckons it's worth the effort.

"A general contents inventory is fairly straightforward as long as you give yourself enough time.

"We spend two to three hours checking our car is serviced, but we don't spend enough time considering whether our house is fully insured."

If you are unsure how much something is worth use a contents calculator to work out the value of your contents. Direct Line has created one which is available here.

If you really have no idea where to start, however, most insurers can provide you with a list of items you should remember to include when making an inventory.

And if you have very expensive or rare pieces in your home, a valuer will be able to help you.

The National Association of Valuers and Auctioneers will give you a list of general contents and fine art valuers.

Meanwhile National Association of Goldsmiths provides lists of jewellery valuers.

You should carry out these assessments every 12 months, according to Mr Coombes. However, if you are going through a major event – moving house or having a baby for example – which is likely to involve you buying new furniture or items, it's best to let your insurer know of any new additions as soon as possible.

You can change your contents insurance cover at any time. Make sure, however, when you make a new purchase to keep your receipts.

You can also buy computer apps which help you to assess your home contents. Paragohome.com, is one such example.

It's a new app available via a PC or iPhone that enables home-owners to keep an up-to-date record of their personal assets, to prevent losing out when making a claim on their home-contents insurance.

Car Insurance

Car insurance is an area where having proper cover is not just essential – it's mandatory. And Colin Greenhill, director for Santander Insurance, urges people to make sure they disclose full and accurate information when taking out their policy, and when renewing.

"It's an offence," he said, "to make any false statements or withhold any relevant information to obtain a Certificate of Motor Insurance."

Yet there are still some sneaky little clauses that could outfox even the most diligent of us.

Modified cars are a classic example. Mr Greenhill explained that vehicles which have been customised or modified can attract higher insurance premiums.

The rules are a little confusing. Basically, no matter how much you spend modifying a car, you will find most insurers will retain the car's original value for the policy.

"This means," said Mr Greenhill, "in the event of a claim you would be looking at the car's unmodified value, and not as it stands with all the extras you may have added."

With rules like this, there might seem little or no incentive to inform your insurer of the modifications.

However, non disclosure will still cause you problems.

Mr Greenhill explained: "One important thing to remember is that you are legally obliged to inform insurers of any modifications that you do.

"This is vitally important as failing to declare them can potentially invalidate your entire insurance policy. This would mean in the event of you making a claim, and the insurers discovering an undisclosed modification to your car, you could be left high and dry with a null and void policy."

Details of this rule will be found in the terms and conditions of your policy.

So what is considered a modification?

Mr Greenhill explained that any modification that increases your car's value would be likely to increase your premium, as would any changes which enhanced its performance.

This might include altering the suspension, tweaking the engine or fitting an exhaust system which boosts performance.

That's not all. Mr Greenhill added: "If at the same time these are fitted professionally then they may also increase a car's value.

"This would automatically make the car a much higher risk on the road and subject insurers to more expensive claim payouts. An insurance policy for a car of this type would undoubtedly cost the owner more."

Experts also suggest you check your car insurance before heading abroad in your vehicle. According to Sainsbury's Car Insurance, while most insurers will provide cover for driving in Europe they also need to be notified of policyholder's plans to drive abroad.

If customers do not do this they are only likely to be covered for third party, fire and theft.

Make sure you check your insurance before driving someone else's car too. There is an assumption that having a fully comprehensive insurance policy means you can drive anyone else's car, but this is not always a given.

Find out more: Read our guide to the biggest insurance myths

Life insurance

This is probably the area you are most likely to be underinsured in. A major study by Aviva recently found 93 per cent of families did not feel they had adequate financial protection, and 63 per cent admitted they did not have even basic life insurance.

A whopping 87 per cent do not have critical illness cover and 89 per cent are without income protection.

However, experts suggest that of all the financial products we own, one of the very first on our list – before credit cards, pensions or even ISAs – should be a very basic life insurance policy.

Louise Colley, head of protection marketing at Aviva, said: "The bedrock of any financial planning should look at what measures are in place in case the worst were to happen.

"If this is ignored then any financial plans are set in sand with no firm foundation."

As a guide, and to make sure you are not underinsured in this area, Aviva suggests following something called Maslow's Heirarchy of Needs pyramid.

This is basically a list of personal finance products we all need, in order of priority.

First on the list is cash, held in an easy access account, to provide us with a fund for day-to-day expenses and unforeseen events.

Next on the list is life insurance, critical illness cover, debt management and income protection – in other words, products which cover any risks a family might face.

After this planning for a new home, or other financial goals, using products like mortgages, bonds and ISAs, is the next priority. Retirement and tax planning come at the end.

Ms Colley added: "Life insurance and income protection can provide families with financial peace of mind in the unfortunate event of a sudden loss of income, and critical illness insurance can provide a lump sum cash payment should the insured suffer serious illness or disease.

"By making sure they have financial protection in place, families can have valuable peace of mind for more financially secure future."

Use the Myfinances.co.uk comparison tools powered by Confused.com to find the best deal on all types of insurance.