Although the news about inflationary increases is no longer dominating the headlines, the pricing pressures seem to remain. That’s because inflation compounds continuously—meaning that while those eye-watering increases have receded a bit, we continue to see the effects.
Taking a look at the family budget and curbing costs where possible makes sense. But don’t be tempted to reduce the coverage levels of your homeowners or vehicle insurance. That move could leave you underinsured.
How is underinsured defined?
When someone has no insurance at all, they are termed “uninsured.” However, if a policyholder does have insurance, but the amount of coverage might not be enough to pay for a covered claim, that individual is considered to be underinsured.
For example, let’s say a homeowner decides to cover their furniture and other personal property for $50,000. This might sound like a lot of money, but it might not be enough for a big loss.
If this policyholder experiences a fire that destroys the kitchen and living room, and smoke damages pretty much everything else in the home, replacing all of the clothing, furniture, kitchen equipment, electronics and more will likely cost more than one expects—and will almost certainly exceed the $50,000 level they selected for coverage. This means replacing any property above that level will have to come out of pocket.
How does a policyholder become underinsured?
Typically, a policyholder learns that they are underinsured at the worst possible time: after they’ve made a claim, only to find out that the loss won’t be fully covered by insurance.
There are a number of ways this can happen. Here are some scenarios that can lead to a homeowner being underinsured.
Not keeping pace with everyday changes – Sometimes a homeowner unknowingly undervalues what they own. This is quite common because it happens so gradually and homeowners don’t update the personal property value on their policy.
Usually, we acquire our possessions over time. We get rid of the ratty old hand-me-down futon from college and buy a proper couch. We buy a new, larger kitchen table when the second child arrives—along with a big-kid bed for the firstborn. Grandparents gift a family heirloom. A bigger television is purchased when the kids start gaming…and so on.
Because these changes accumulate slowly, homeowners don’t think about what replacing everything at the same time might cost. But that’s exactly what happens following a major loss.
So, if the last time you thought about your personal property valuation was when you still had that uncomfortable college-era futon, it might be time to touch base with your insurance agent to discuss how much personal property coverage you should have.
Forgetting to add high-value items
Homeowners sometimes don’t realize that certain high-ticket items might not be covered by their insurance, because virtually every policy has per-item limits. Valuable jewelry is one of those items that frequently exceeds a policy’s limits—and, unfortunately, it can be a prime target for thieves.
A homeowners policy might have a per-item limit for stolen property of $2,500—so, if someone breaks into your home and steals a $15,000 engagement ring, insurance will only cover $2,500 of that loss, (minus your deductible).
Changes in economic factors
Another way policyholders can unknowingly become underinsured is when external cost factors suddenly outpace coverage limits. This was an unwelcome surprise for some policyholders during the pandemic, when shortages of both materials and labor caused the cost of rebuilding to rise dramatically.
The result of this was that for some homeowners who experienced a total loss—such as a disaster destroying their home—the amount of their coverage wasn’t enough to rebuild their home.
Many of the primary means of becoming underinsured are fairly passive. In these instances, relying on a “set it and forget it” mentality can be a problem.
Cutting coverage to save on premium costs
There is another way homeowners can become underinsured that is the result of a decision to reduce coverage in order to save money on premiums. This is an action taken by a policyholder that can have serious negative consequences.
Actively choosing to reduce coverage can leave a homeowner vulnerable, because accidents and natural disasters can and do happen.
Switching coverage without care
Some policyholders discover that they are underinsured when they go to make a claim and find out the reason they saved so much money when they switched insurance companies is that they didn’t make certain they were getting comparable coverage.
When shopping around for better rates, have a list of your current coverage available—and make absolutely certain that you’re getting quotes that meet or exceed your current coverage levels.
How can I guard against being underinsured?
Actively reviewing your policy with your insurance agent is the single-best step you can take to prevent being underinsured. Your agent will ask you about your personal property coverage, and any special high-value items.
They’ll also be able to tell you if it is recommended that you adjust your coverage levels up to address local rises in rebuilding costs, or if changes in state regulations on insurance might have an impact on your coverage requirements.
If reducing coverage leaves me underinsured, how can I address rising premium rates?
Premiums are rising across the country, so you aren’t alone in wondering how to address costs.
One way to reduce premiums that you may want to consider is increasing your deductible. A deductible is the amount that the policyholder is responsible for paying, in the event of a covered loss. When you increase your deductible, you’re offering to shoulder more of the cost of paying a claim. Insurers take this into consideration when setting premiums.
Another way to reduce premiums without cutting coverage is to ask your insurance company about any discounts for which you may qualify.
For auto insurance, this could mean successfully completing a safe driver course. For homeowners, upgrading smoke alarms, installing theft-prevention measures, or using smart home technology such as leak detection systems might qualify you for a discount.
And, if you have multiple insurance products through the same insurance company, make sure you’re getting the most out of bundled lines discounts.
Should I shop around for other insurance?
While time-consuming, shopping around for the best deal can net you savings on your insurance. But, as noted above, it is important to make sure that you’re receiving estimates for comparable coverage.
If you are considering getting additional quotes, contact the experts at Rate Insurance. They’ll talk to you about your needs, and with access to hundreds of insurers, they can find you the best coverage at the best price.
