For some, insurance is just one more item on their financial checklist. Whether you mortgage a home, buy a car or start a business, some type of insurance is usually required. But what if, despite paying all your premiums on time, your coverage comes up short when you encounter a loss?
There are at least three ways you might be underinsured:
• Not carrying insurance for new risks as your life circumstances change.
• Having a policy with coverage limits that are too low to cover a potential loss.
• Failing to notice policy exclusions that don’t protect all your assets.
To avoid finding yourself in one of these situations, it’s important to understand where your coverage may be insufficient — or lacking altogether.
The Home Valuation Problem
Prices, especially on homes, can rise and fall dramatically. In most cases, the insurer will pay for damage to your home up to the limit set in the policy. But what if that upper limit is no longer enough to replace your home when prices for materials and labor go up due to inflation or other causes?
Some policies include “extended” or “guaranteed” replacement coverage. It’s not uncommon to see materials and labor jump in price following a natural disaster that damages multiple homes. Extended coverage will increase the maximum amount the insurer will pay, adding a percentage — 20%, for example — to the stated policy limit. Guaranteed replacement is just that: You are guaranteed to get enough money to rebuild your home no matter what it costs. Naturally, both options will add to the cost of your premium.
The Value of Valuables
The valuation problem also applies to your possessions. For personal property coverage, you can choose between replacement cost and actual cash value. Replacement value means the insurer pays to replace your belongings with new comparable items up to your policy limits. If you lose your home in a fire and you had an older iMac sitting on your desk, you’ll get enough to purchase a new iMac. However, if you choose the actual cash value option, you’ll get the current cash value of that computer — as determined by the insurer — meaning purchase cost minus depreciation, which is going to be less than the cost of a new comparable model.
Change in Circumstances
If you previously had no one financially dependent on you and then get married or have a child, you may be underinsured as a family if you have no life insurance to replace your income should something happen to you. Or, your children or other family members may develop conditions or needs that your existing coverage is insufficient for. Or perhaps there are now grandchildren you want to include as beneficiaries. Think through all the people in your life who you might want to provide for in the event you’re no longer around.
Get Help From an Expert
As with all things related to insurance, seek out a knowledgeable agent or speak to a financial professional for advice to get the coverage you need at the best price and terms. Be sure to read part two of this discussion, where we’ll examine policy exclusions, protection against lawsuit risk and the importance of understanding your health insurance deductibles.