Insurance Basics for Beginners: How to Avoid Being Overinsured and Underinsured
Hui Juan Neoâ—Ź
You’ve probably heard the term ‘underinsurance’ tossed around before. But what does it actually mean – and how do you know if you’re underinsured or overinsured?
When it comes to insurance, getting the coverage ‘just right’ can feel a bit like trying to hit a moving target.
But finding the insurance sweet spot isn’t impossible.
Let’s walk through the basics of ensuring you have the right level of coverage. Whether you’re reviewing your first insurance policy or a seasoned pro, you’re sure to pick up helpful tips to ensure your coverage is just right.
TL;DR: Insurance Basics 101 to Avoid Under and Over Insurance
What’s covered in the article:
- What is underinsured and overinsured?
- How do you calculate your insurance needs?
- How do we avoid common traps?
- What costs would there be if you overinsured yourself?
What Is Insurance?
For the uninitiated, insurance offers you financial protection against significant and unforeseen losses. Simply put, you pay a fixed amount of money (called a premium) regularly to an insurance company, and in return, they will pay for damages or losses above a certain amount.
It is not a new concept to most people, but it is often boring complex, simply because it is technical.
Terms like deductible, excess, or co-payment are often used, and you must understand their definitions to avoid getting too many different plans.
Example: If you have a health insurance policy with a $500 deductible, you must pay the first $500 of your medical expenses yourself. Once you’ve paid that amount, your insurance will cover the remaining costs according to the policy terms.
If you’ve ever wondered if you have enough protection or if you’ve ever felt uncomfortable paying so much for insurance, this is how you assess.
Underinsured vs Overinsured
Being underinsured means your policy won’t cover the full cost of potential losses, leaving you on the hook for the rest.
On the flip side, being overinsured means you’re paying higher premiums than necessary for the level of risk you need to insure. This can drain your finances unnecessarily and divert funds from other important financial goals.
Signs of Underinsured and Overinsured
That said, in the review process, spot any red flags waving in front of you!
| Signs of Underinsured | Signs of Overinsured |
| Minimal Coverage Plans: If your health insurance barely covers basic medical expenses, you might face hefty out-of-pocket costs during a serious illness | Duplicate Policies: Multiple insurance policies covering the same risk can be redundant. For instance, if you have a comprehensive company health insurance plan, you might not need an additional personal health insurance plan.
Check if your plans are bundled plans as well. The premium could be expensive because of features that overlap with your other plans. |
| Inadequate Life Insurance: If your life insurance policy doesn’t provide enough to cover your family’s living expenses, debts, and future needs, they might struggle financially if something happens to you. | Excessive Coverage Amounts: If your life insurance coverage far exceeds what your dependents would realistically need, you’re likely paying more than necessary. |
| Basic Home Insurance: If your home insurance doesn’t cover natural disasters or theft adequately, you could pay a significant amount to repair or replace your property. | High-Premium Plans: Paying for high-premium plans with benefits you are unlikely to use can be wasteful. Evaluate whether the extra features are truly beneficial for your situation. |
Let’s learn from examples.
How Can You Be Underinsured?
Being underinsured means your insurance policies don’t provide enough coverage for your needs.
This often happens when policy limits haven’t kept up with inflation or life changes. For example, if you bought a home 10 years ago but haven’t increased your homeowner’s coverage since then, a major claim today could easily exceed your limits.
The same goes for car, health, and life insurance. As your assets increase in value, you take on more debt, or healthcare costs rise, your existing policies may no longer fully protect you.
It’s a good idea to review all your insurance policies at least once a year to ensure that the existing coverage still meets your current needs.
How to Calculate Your Needs
The trick is to find the right balance of coverage for your needs without overpaying.
But how do you do that?
Evaluate Your Needs
- Health Insurance: You can consider supplementing MediShield Life with an Integrated Shield Plan (IP) or Careshield Life supplement can be beneficial, but ensure the additional coverage aligns with your healthcare needs.
- Life Insurance: Calculate your necessary coverage by considering your family’s living expenses, outstanding debts, and future needs, such as education costs. Tools like the Life Insurance Association Singapore (LIA) calculator can help.
- Home Insurance: Ensure your home insurance covers potential risks relevant to your area, such as fire and theft. If you live in a landed property, consider additional coverage for natural disasters e.g., floods.
How to Avoid Common Insurance Traps?
Regularly Review Your Policies
Life circumstances change, and so should your insurance coverage. Major life events like marriage, having children, or buying a property necessitate a review of your insurance needs. Schedule an annual review of your policies to ensure they align with your current situation.
Don’t Skimp on Basics
Ensure you buy enough third-party liability for cars and health insurance.
Getting third-party liability can protect you if you cause an accident, home insurance covers damage to your home and belongings, and health insurance helps pay for medical care, treatment, and hospital stays.
If cost is a concern, you can increase the deductibles (out-of-pocket before insurance company starts to cover the remaining costs of a claim) to lower premiums.
Avoid Excessive Extras
Be wary of expensive riders and add-ons that provide minimal benefit. For example, you may not need earthquake coverage if you live in an area with little seismic activity, i.e. Singapore. Expensive life insurance policies are also usually unnecessary if you have dependents.
You may be better off sticking to a basic term life insurance as the extra premiums you pay for overinsurance are essentially wasted, and that money could be better spent elsewhere or invested.
Over time, the additional premium costs really add up. It’s a good idea to review your policies at least once a year to make sure you have appropriate coverage limits based on current costs to rebuild your home or your vehicle’s value. You may be able to lower coverage amounts and save on premiums.
Afterthoughts
So there you have it—a quick guide to help you determine whether your insurance coverage is at the right level.
Don’t just accept what you’re offered or keep what you have out of habit.
Take some time to think through your personal situation and risk factors to make sure your policy limits are suitable.
Getting this right means you’ll have peace of mind that you and your loved ones are protected financially in case a disaster strikes. And you won’t be paying over the odds for cover you don’t actually need either.
Finding the insurance sweet spot takes some work, but it’s worth it for your future financial security and well-being.
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