In today's economic climate and with the rise of non-advised insurance sales (particularly through price comparison websites), many customers focus on the price of the insurance, rather than the cover provided and may inadequately insure items to maintain lower premium levels. Research suggests that one in five households could be underinsured. But if you have not had a claim before then it can be difficult to see just how much of an impact underinsurance could have on your personal finances.

So what is underinsurance and what does it mean to you? When you take out insurance of any type, your premium is calculated on your individual circumstances and the amount of cover you've selected. Underinsurance occurs if you have not taken out enough cover to meet your needs. Underinsurance can result in claims being rejected, additional premiums being requested, or most commonly, settlements being proportionately reduced by the level of under insurance, (known as "average").

To illustrate the principle of average more clearly: if you have £250,000 of buildings cover, but your reinstatement value should actually be £500,000, you may only receive half of any claim you make on that insurance. Putting this in context, if you suffered a partial loss, and the costs to reinstate your property were £100,000, the claim would be settled at £50,000 as only 50% of the replacement value was declared.

This would mean that you would need to source additional funds to account for the shortfall in the claim settlement. Once a loss has occurred, it is too late to avoid the negative impact of underinsurance and this is why it is so important to get your sums insured right. Can you really afford to take this risk to save a few pounds on the premium?

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