One of the challenging aspects of buying any type of insurance is determining how much coverage you need.
Buy too little insurance and you won’t have enough to get through a tough situation when you actually need it to do its job the most.
Buy too much insurance and you’re wasting money every month on premiums when you could be saving more for retirement or another long-term goal.
And chances are, you’re not an insurance expert. So you rely on others to tell you the right amount, or you just buy what you think you can afford.
This list applies to most types of coverage, be it homeowners, auto, life, or disability insurance.
Most people are underinsured. That’s often of their own doing, as people want to spend as little as possible on a product they never plan to use.
You may be underinsured if:
You haven’t reviewed or updated your policies in years. Life changes fast, which means your insurance needs do, too.
The insurance policies you bought as a single person living in an apartment and using rideshare services to get around will not help the current you who has a spouse, several kids, and multiple cars parked in the garage of the suburban home with a six-figure mortgage.
An old life insurance policy may barely give your surviving spouse enough money to pay off debts, never mind sending kids to college or maintaining their current lifestyle.
And does your current disability policy account for the additional $30,000 you earn now compared to when you bought the policy?
You only have group insurance. If you rely solely on group life or group disability insurance, chances are you are underinsured.
Participating in a group insurance plan is a good way to supplement your coverage at a reasonable cost. But you should also own a personal long term disability insurance policy to ensure that you have adequate coverage in the event you need it.
There are a number of downsides to group insurance that can leave you with inadequate benefits. You could lose group coverage if you are no longer employed or part of the group providing the coverage. Group plans also do not offer the level of coverage and benefits that individual policies provide.
You have to pay a large out-of-pocket cost before benefits kick in. One way to save money on insurance is to have a high deductible or a longer elimination period for disability insurance. These are the amounts you pay before you receive insurance benefits. If you have high deductibles on your home and/or auto policy and an elimination period longer than 90 days on disability coverage, you may be underinsured.
[ Read: How much disability insurance do I need? ]
On the flip side, you may be overinsured if:
You have paid off debts or you have fewer obligations. The most common reason to be overinsured on a life or disability possibility is if you have fewer obligations than you did when you bought the policies.
If you no longer have a mortgage, need to pay for your children’s education, or have significant debts, you may not need as much life or disability insurance. Also, if you’re retired and your income no longer depends on your ability to work, you may not need these types of coverage.
Your homeowner’s policy overestimates construction and replacement costs. If your home is destroyed by fire or another covered event, the amount of your insurance benefit is based on how much it will cost to rebuild your home on the same lot. If the cost to build your home is less than what the policy provides, you may be overinsured.
The same goes for replacement costs. This is the amount you would need to replace all the possessions you lost in the covered event. Do an inventory of your house and add up what the cost would be to replace your items, then compare that estimate to what is stated in your policy.
Your auto loan provides more coverage than your car is worth. When you first buy a car and require a loan, you’re required to have comprehensive and collision coverage. Comprehensive insurance covers damage by events other than collisions, such as a tree falling on the car. Collision covers damage to your own vehicle caused by an accident you or an uninsured driver causes.
Neither type of coverage is mandated by law. It’s only required by a lender. Once you’ve paid off a loan and the car is not worth fixing if it’s damaged, there’s no reason to have comprehensive or collision coverage.
The best way to avoid being overinsured or underinsured is to enlist the services of a trusted, licensed independent insurance agent. An independent agent is contracted with multiple insurance companies. They can offer you multiple options and can choose among different carriers for the best combination of price and features.
It’s also highly recommended to meet with your agent at least once a year to review your coverage and make adjustments as needed.
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
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