People often resort to underinsurance for several reasons, but it is generally not a healthy financial decision, writes JOSEPH INOKOTONG.
Under insurance typically refers to a situation where the coverage amount of an insurance policy is less than the actual value of the insured asset. This can lead to financial losses because the policyholder may not receive full compensation in the event of a claim.
There are two common contexts for underinsurance: Property Insurance – If a home or business is insured for less than its rebuilding cost, the insurer may apply the “average clause” and reduce the payout proportionally. Health Insurance – If a policy has low coverage limits, high deductibles, or exclusions, the insured person may have to pay significant out-of-pocket expenses.
Avoiding underinsurance is crucial to ensuring adequate financial protection. Some key strategies are necessary to avoid this. For property insurance, for example, it is important to accurately assess the property value by getting professional valuations for the home or business property to determine the true replacement cost. Other avenues to explore include updating the coverage regularly through annual policy and adjustment for inflation, renovations, or increased property values. Checking the policy terms is required to ensure the policy covers full replacement costs, not just market value or depreciated value. One may consider Add-ons, as some policies offer riders for high-value items like jewelry, electronics, or home office equipment.
To avoid underinsurance for health insurance, it is necessary to choose an adequate sum insured, which entails opting for a coverage amount that matches the healthcare needs, considering inflation and potential medical costs. It also requires reviewing policy exclusions by understanding what’s not covered to avoid unexpected expenses as well as checking co-pay & deductibles. A lower deductible may mean slightly higher premiums but can save you money during a medical emergency. Policyholders should consider riders & top-ups. If the base policy has low coverage, consider additional coverage for critical illness, maternity, or specific treatments.
People often resort to underinsurance for several reasons, but it is generally not a healthy financial decision. People choose underinsurance due to cost concerns. Many opt for lower premiums to save money, unaware that it may lead to higher out-of-pocket expenses later. Others do it because of lack of awareness. Some do not fully understand how much coverage they need or assume their policy is sufficient.
Other reasons are inflation and rising costs push some people into it. Over time, medical costs and property values rise, but people may forget to update their policies. Employer-provided coverage – Some rely solely on workplace health insurance, which may not cover all expenses or may not be portable if they change jobs. Misplaced optimism – Many assume they won’t face major health issues or disasters, leading them to underestimate their insurance needs.
The practice is financially unhealthy because it can lead to significant financial burdens in emergencies, forcing people into debt or liquidating assets. Also, it is mentally stressful. Knowing that coverage is inadequate can cause anxiety and uncertainty about the future. Risky for families – Dependents may suffer due to insufficient life or health coverage, especially in critical situations.
For example, if someone has a home worth N3 million but only buys N2 million worth of insurance, they are underinsured. This can leave them exposed to significant financial loss in the event of a disaster or incident that is covered by the policy. If the home is underinsured, one may not be able to fully rebuild after a disaster or repair extensive damage to the property. If a car is underinsured, one may not have enough coverage to pay for repairs or replace your vehicle if it is damaged or stolen.
Insurance providers, governments and consumer groups can work together to educate people about the importance of adequate insurance coverage and the risks of underinsurance. Improved policy design: Insurance policies can be designed to better explain coverage and options to customers. This can help people make more informed decisions about their coverage needs. Price regulation: Governments can implement price regulations to make insurance more affordable for low-income households.
Regulations and penalties can act as powerful deterrents against underinsurance. With mandatory minimum coverage, governments can set minimum coverage requirements for insurance policies. If people do not meet these requirements, they may be subject to fines or other penalties.
Market sanctions can also serve as a deterrent. Insurance providers can be fined or penalised for selling policies that do not provide adequate coverage. This can encourage them to offer better coverage options.
Increased monitoring is another potent tool that can mitigate underinsurance. Governments and insurance regulators can increase their monitoring of insurance policies and providers to ensure that customers are getting the coverage they need.
Experts say “Underinsurance is often caused when it is applied and searched for as a quick to-do. If rushed and not entered correctly, this can cause you to be underinsured. You think by filling in the supplied forms or making a phone call to answer the relevant questions, the value of your property is protected should you need to make a claim. However, the forms you supply and the questions you answer are typically pre-filled and the guidance is based on averages.”
Also, underinsurance can be caused by incorrectly calculating the value of your home and contents, failing to include, for instance, the cost of removing debris in your calculations, increased repair costs caused by inflation and lessening your premiums without thorough care.
It is the client’s responsibility to avoid underinsurance. Whether your insurance policy cover is inaccurate due to deliberate misinformation or unintentional carelessness, your insurance provider will not act with any empathy if you need to make a claim. When applying for insurance cover, it is your responsibility to make sure you consider the replacement cost of all your property.
The consequences of underinsurance can be significant regardless of whether you are accidentally or deliberately underinsured; the results are the same. Underinsurance can be damaging for you in two different ways, the inability to claim for your full loss. The insurer will apply the average clause, meaning the insured will be able to claim even less.
“The insurance provider may also decide to cancel the cover if you are underinsured. This has further implications for obtaining building and contents cover from an alternative provider: you will find you have a limited choice of providers willing to provide cover and your premium cost will likely increase because of a prior canceled policy. An insurance provider who discovers your cover was insufficient (i.e., you were underinsured) may also void and recall any previous payouts for claims made against that cover, adding to your financial difficulty,” an expert explained.
According to the expert, most insurance policies typically contain an underinsurance penalty clause, which insurance professionals know as ‘average.’ The average clause in insurance states that if a property is underinsured, the insurer is only liable to pay for a percentage of the value of items lost, leaving the policyholder to pay for the remaining cost, determined by the percentage that the property is underinsured.
Underinsurance clauses do not only apply to building cover but can also apply to other parts of the policy, such as loss of rent, stock and contents, and landlord contents cover.
Avoiding underinsurance requires a thoughtful understanding of your own insurance needs and a proactive approach in regularly reviewing and updating the coverage. To begin with, it is vital to fully comprehend what your insurance policy covers and what it does not. This will allow you to identify any potential gaps in your coverage.
It is also essential to accurately assess the value of your assets. Underestimating their worth can lead to underinsurance. Regularly reviewing your insurance policy and updating it as your life circumstances change is another crucial step to avoid underinsurance.
It is pertinent to understand a policy and ensure full comprehension of the ins and outs of the insurance policy, including what is covered and what is not to effectively avoid underinsurance.
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