Ideally, we all want to have exactly as much insurance as we need to protect our assets and take care of ourselves in case of an emergency. Unfortunately, though, many people are overinsured or underinsured rather than having the right amount of insurance. Here are some tips for preventing this issue and why you should be aware of it.
What Is Underinsurance?
Underinsurance occurs when a person doesn’t have enough insurance to cover what needs to be covered. This can include a medical condition, a property, or something else. According to Investopedia, inadequate coverage can result in a claim that is higher than the amount that will be paid out by the insurance policy, causing severe economic losses for the individual holding the policy.
What Is Overinsurance?
On the other hand, overinsurance can exist when an insured individual has purchased too much coverage, and the coverage actually exceeds the value of the property or the risk that is insured. This can also result in a loss when the individual has put so much money into their insurance policy and realizes they will never get anywhere near the amount back, even if they did need to file a claim.
The Risks of Over and Underinsurance
People who are underinsured are at a serious risk of financial crisis. If a person’s house burns down and is only insured for part of what it will cost to replace the house and its contents, this can put a severe financial burden on the individual, who now has to make up the rest of the money from somewhere else.
Underinsurance is much more common than overinsurance because people often choose to underinsure their properties or risks due to the lower payments. However, when they suddenly need assistance, their insurance plan is not going to cover their needs.
According to Business Dictionary, those who are overinsured sometimes are tempted to create a false claim in order to gain back some of their losses. Otherwise, they will not receive the full amount of money they have put into their insurance plan. However, creating false insurance claims is illegal and extremely dangerous, which is why when many people realize they have been overinsured, they simply take the loss.
Tips to Prevent Yourself from Being Over or Underinsured
As stated previously, most people do not become overinsured unless they have lots of money to begin with. Nevertheless, it is important to avoid this issue, and you can do so by being very knowledgeable on the subject of your risk factors and the worth of your property, assets, etc.
Ways to prevent being overinsured include…
- Finding an insurance agent you can trust. Many times, those who have money are advised to buy too much insurance because they can afford it. You will want to find someone who will not put you in this position.
- Avoid a whole life insurance policy, as these are often very expensive. They are usually about 5 to 10 times more expensive than a term life insurance policy, and they are really only helpful for a small percentage of individuals.
- Make sure you’re not taking out insurance that is clearly worth more than you need. For example, if you make $50,000 a year, a $2 million life insurance policy is probably too high to be necessary and to be helpful to you. You’re going to be making much higher payments than necessary.
- If you have a very old policy, you may be paying more than necessary just because you’ve never updated your policy.
Because being underinsured is so common, it is important to be aware of the dangers of this issue. You may think you are safely covered, but the truth is, you could be dealing with serious problems if you do ever experience an illness or a disaster.
Ways to prevent being underinsured include…
- Find out what is automatically covered by your policy and what isn’t. Sometimes, your homeowner’s or renter’s insurance will only cover the property itself, not what’s inside.
- You may want to buy additional coverage for certain items that are necessities (like your laptop) or for high-value items in your home.
- Document all your possessions.
- Talk to an insurance agent about combining your policies in order to pay less but to be more insured.
Update your insurance policy often and stay abreast of your needs.