Are You Over- or Under-Insured?

 

Are you over-insured, under-insured, or not so sure? Discover the dangers of having too much or too little cover and find out how to get the balance just right.

 

Nobody likes to waste time or money — and checking on your insurance status is a great way to save both. Whether it's car, household, credit, funeral or any other kind of insurance, it's easy to have too much, or too little if you don't pay attention.

 

Being over-insured means having too much cover, in other words, being insured for more than the product you're insuring is worth. Under-insurance is the opposite: not sufficiently covering the value of your life or items in terms of insured cover.

 

Key to understanding both over- and under-insurance is the concept of 'replacement value'. The replacement value of goods is what it would cost you, at the time that you claim, to replace the insured items with like-for-like or similar new ones.

 

Take this simple example: if your car costs, say R100,000 to replace, and you're insured for R1 million, then you're over-insured; and if you're covered for R100, you're under-insured. Easy, right? Not always...

 

Paying for over-insurance of a R1 million doesn't mean you'll get paid out for that amount. Your insurer will most likely cover you for what the asset is worth to replace it, so you'll be overpaying in premiums on an amount you can't claim for.

 

The opposite is true if you're underinsured as your monthly premiums won't match what the asset is actually worth. This means that your insurer will cover you for what you've paid for. Neither scenario is ideal. Let's take a closer look.

 

Learn more: Read the Small Print

 

What are the risks of over- and under-insurance?

Some insurance policies have limits on an insured item and, should you suffer a loss, the insurer may only pay out the maximum limit, regardless of the amount you've insured the item for.

 

You may also have unknowingly insured your car for its retail value as it can sometimes be the default amount. However, the trade value of your car will decrease over time (even in short periods like just over a few months). This means, in the event of a total write-off, your insurer may pay for the retail value when trade value of the car will do to replace it. If you don't require or want the retail value, then you shouldn't be paying more for it in monthly premiums.

 

If the amount of insurance cover you have isn't enough to cover a loss or damage in the event of a claim, you will be paid less than it costs to replace or repair that item. That means you'll have to pay the difference out of your own pocket.

 

If money is tight, you may decide to drop the insurance cover on an item to save money on your monthly premiums, but it's important to weigh up the saving you'll make over time versus the shortfall you might face.

 

Learn more: Car Write-Offs: What You Need to Know

 

Signs that you're over- or under-insured

You'll typically find yourself over-insured on items that decrease in value, such as your car. Keep an eye on that and be sure to compare car insurance quotes regularly.

 

It may sound counterintuitive, but you could also be over-insured on your life insurance. While you want to leave your family enough money to make sure they're comfortable, it's important to assess the costs you're looking to cover. You may have paid off your bond, put your children through education up to tertiary level and have no outstanding debt. In that case, you simply need to ensure that your cover is adequate to help look after a partner or perhaps grandchildren.

 

If you're still paying premiums based on the cover you took out 30 years ago, when all those costs were still on the horizon, you've likely been overpaying on premiums you could have invested elsewhere for handsome returns.

 

Understanding what your different policies cover you for can help rationalise your insurance status. Some banks may include funeral cover as part of an account, so there's no point in having a separate policy for that. You may have included cover for credit card debt in your life insurance, but you might also be paying for credit insurance as part of your banking fees.

 

Meanwhile, you'll typically find yourself under-insured for things that accrue value or are affected by inflation. That TV you bought two years ago that got fried by loadshedding may cost more to replace than you paid for it.

 

Or you may have bought your home for a few hundred thousand rand a decade ago, but it could be worth significantly more today. If it were to burn down, your payout would be based on the original value, and you probably wouldn't have the money to rebuild or purchase a similarly sized or located property.

 

Learn more: Insurance: Use It or Lose It?

 

Too much insurance, too little insurance... Your goal, of course, is to get your cover just right. If you have a home, make sure you have adequate Building Insurance and Household Contents Insurance. If you have Life Cover, ensure that you're paying to cover the right things. For Car Insurance, make sure you're paying premiums that reflect the value of your car at that stage in its lifespan.

 

To do all that, you'll need to consider, compare quotes and consolidate your cover.

 

This article is for informational purposes only and should not be construed as financial, legal or medical advice.