Everything You Need to Know About Being Underinsured

You're said to be underinsured when your policy doesn't provide sufficient coverage when calamity strikes. Whether it's an insured person getting involved in an accident, or experiencing a serious health condition, or a home destroyed by any form of natural calamity, having adequate insurance coverage can make all the difference in your financial position.

What Happens When You Have Inadequate Insurance?

Underinsurance can lead to a severe financial crisis, depending on the insured asset and the extent of the coverage deficit. A policy with gaps and exclusions can leave you with limited coverage when you need it the most. With such a policy, the loss resulting from a claim can easily outstrip any marginal savings you might have made in premiums.

Underinsurance Relating to Home Insurance

Because of the increasing cost of construction as well as the growing severity of weather-related damage, the cost of insuring homes has gone up by almost 60% in the last decade. Civil unrest has also been seen to impact the number of claims and, consequently, lead to an increase in premiums. However, underinsuring your home as a response to increased premiums can potentially lead to a huge financial loss, depending on the deficit in your insurance coverage. For instance, say you insure your residence against all risks with a $200,000 policy that comes with a $20,000 deductible. The house is then destroyed by a fire, and the cost of rebuilding the home comes to $300,000. In such a case, you will have to make up for the $100,000 difference yourself, in addition to paying the $20,000 deductible out-of-pocket.

Strategies to Mitigate the Risk of Home Insurance Underinsurance

• If your rate rises sharply, talk with your trusted insurance advisor. An independent agency like Tompkins Insurance can leverage relationships with many insurance carriers, potentially leading to more affordable options with the right amount of coverage.
• If you choose to stick to your insurer, consider getting a policy that comes with a higher deductible but offers adequate coverage.
• Ensure you know your policy's exclusions.
• If you can't get a policy because you reside in a high-risk zone, consider purchasing one through the Fair Access to Insurance Requirement Program, says the Insurance Information Institute (III).

Underinsurance Relating to Health Insurance

A person is said to be underinsured if they spend from 5% to 10% of their annual earnings on out-of-pocket healthcare expenses or if their health policy's deductible is over 5% of their annual wages. A 2020 study by Commonwealth Fund revealed that a quarter of American workers with employer-backed health plans were underinsured. Selecting an ideal health insurance policy often entails finding a balance between lower premiums (which usually mean higher copays and deductibles) and broader coverage. This applies whether you're choosing from employer-backed plans or selecting an individual plan through your state healthcare exchange. As an employer, if you ensure that your team has adequate health insurance coverage, you not only show your concern for their well-being but also make it easier for them and their families to access better healthcare options. As a result, stress decreases, and productivity and workplace satisfaction increase.

In order to ensure your employees aren't underinsured:

1. Educate your employees. A trusted advisor like Tompkins Insurance can help your employees understand their coverage options.
2. Explain the link between deductibles and premiums. If you offer multiple plans, explain why health insurance with the lowest premiums isn't always the most affordable option.
3. Offer voluntary benefits such as critical illness coverage so that employees can tailor their benefits based on their personalized needs.
4. Encourage emergency funds.
5. If you offer a qualified High Deductible Health Plan, encourage employees to open health savings accounts.

In the event of a disaster, underinsurance can potentially lead to dire financial consequences, even when the disaster is a named peril. If you have any questions about your coverage and whether it is adequate to meet your specific needs, contact the team at Tompkins Insurance Agencies. We look forward to helping you find a solution that’s right for you.