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Underinsurance: A Silent Threat That You Can’t Afford to Ignore
What is underinsurance?
Underinsurance can be one of the following:
- too few conditions are covered or coverage is inadequate
- amounts of out-of-pocket expenses are excessive
- coverage is perceived as inadequate
- A combination of these.
According to the latest Money & You report, there are still 6 in 10 Kiwis whose families would be left to cover things from own pocket if there is an unexpected event to occur.
Underinsurance is a silent risk that can lead to significant financial strain in the event of a claim or total loss. If you’re underinsured and something happens, the insurance claim may not cover the full replacement costs, leaving you out-of-pocket. Kiwis should evaluate if they have sufficient covers in place to prepare for future significant insurance event, which is a matter of 'when', rather than 'if'.
Underinsurance can happen for several reasons:
- Personal situation changes. Insurance may not be enough after a family structure change, obtaining a mortgage, or a pay rise.
- Inflation: Over time, the cost of materials and labour increases, leading to a gap between the insured value and the actual replacement cost.
- Underestimating values: Insufficient coverage often stems from not fully understanding the true replacement value.
- Increased premiums: As insurers face higher costs, they may increase premiums to maintain profitability. Higher premiums can lead to policyholders opting for lower coverage limits or higher deductibles to keep their insurance affordable, which can result in underinsurance.
- Incomplete valuation: Failing to include all necessary assets in the valuation process can result in underinsurance.
The difference between a bank and insurance valuation. A bank valuation often reflects the market value of an asset, which is not suitable for insurance purposes. This is because it won’t reflect the true cost of replacement or rebuilding. An insurance valuation, on the other hand, considers the full replacement cost, ensuring that you are adequately covered in the event of a loss.
Steps to avoid underinsurance
- Wider consideration and calculation when purchasing or renewing insurance policies.
- Regularly review and update their insurance coverage to reflect current values and risks.
- Work with a professional insurance valuation service for annual reviews.
- Regularly review the sum insured.
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Patrick Wang
