When it comes to insurance, no one wants to waste time or money. Taking the time to assess whether you are over-insured, under-insured, or unsure can save you valuable resources. Whether it’s car, home, business or any other type of insurance, it’s crucial to pay attention to avoid having too much or too little coverage.
Over-insurance occurs when you have more coverage than the value of the item being insured. On the other hand, under-insurance means you haven’t adequately covered the value of your possessions with your insurance policy. Understanding the concept of “replacement value” is key to comprehending both over- and under-insurance. It refers to the cost of replacing the insured items with equivalent new ones at the time of the claim.
Consider this simple example: If your car costs R100,000 to replace, and you are insured for R1 million, you are over-insured. Conversely, if your coverage is only for R100, you are under-insured. However, the situation is not always as straightforward as it seems.
Paying for over-insurance doesn’t guarantee that you will receive a payout for the excess amount. Typically, insurers will only cover the replacement value of the item, resulting in overpaying premiums for an amount you cannot claim.
Similarly, under-insurance means that your monthly premiums do not match the actual value of the insured item. Consequently, if you make a claim, the insurer will only compensate you based on what you have paid, leaving you responsible for covering the remaining costs. Neither scenario is ideal, so let’s delve deeper into the risks associated with over- and under-insurance.
There are cases where insurance policies have limits on coverage for certain items. In the event of a loss, the insurer may only pay out up to the maximum limit, regardless of the amount you have insured the item for. For instance, your car might have been insured for its retail value, which depreciates over time. If your car is written off, the insurer may compensate you based on the retail value, while the trade value would be sufficient for a replacement. Paying for retail value when you don’t require or want it results in unnecessary higher premiums.
During financially challenging times, it may be tempting to drop insurance coverage to reduce monthly premiums. However, it’s important to consider the potential shortfall you may face versus the long-term savings you would accrue.
If you are still paying premiums based on coverage you acquired many years ago, when those costs were more relevant, you may be overpaying without utilizing the funds elsewhere for better returns.
Achieving the right balance in insurance coverage is the ultimate goal. Ensure you have adequate building insurance and household contents insurance if you own a home. Assess whether your business all risk cover aligns with your current needs. When it comes to car insurance, pay premiums that reflect the value of your vehicle at its stage in its lifespan.
To achieve the ideal insurance balance, consider comparing quotes and consolidating your coverage.
If you’re looking for comprehensive insurance quotes for your car, business or home, Fachs Financial Services has a team of skilled brokers to help you find the right coverage for your unique needs.
*Please note the following blog post is for information purposes only and does not constitute financial or legal advice.