We spend a lot of time making sure people have enough insurance. Not carrying enough liability coverage or updating policy limits over time can put you in a financial crisis after an accident. But there’s another side to insurance that should be avoided as well — having too much insurance.
While it’s not as common as being underinsured, being over-insured is something to be aware of.
When you purchase a homeowners insurance policy, you’re given the option between insuring your home at actual cash value or replacement cost value. It may cost more, but the best option is replacement cost. This means that you’ll be compensated for what it costs to completely rebuild your home. Actual cash value policies factor in depreciation, leaving you short when it’s time to rebuild or repair your home.
Some owners, however, base their policy needs on the market value of their property which isn’t the same as the replacement cost value. Market values include the value of the land the property sits on and can increase over time, but not necessarily at the same rate construction costs will. Homeowners who use the market value of their home to determine their policy limit are overpaying for their insurance and are often severely over insured.
The most common problem in buying auto insurance is not buying enough liability and underinsured/uninsured motorist coverage. Many drivers believe that they won’t get into an accident, the other driver will have plenty of insurance, or the accident won’t be “that bad.” When they’re left with the financial burden of a car accident, they learn the truth.
But there are times you may have more auto insurance than you really need. It all depends on the vehicle you drive. If your vehicle is new, costs a lot, or carries a large balance on an auto loan, comprehensive and collision coverage are necessary. But if you’re driving an old beat-up vehicle that would only be worth a few hundred dollars if totaled, you likely don’t need comprehensive or collision coverage. The best way to test if you need it or not is to ask yourself if you could afford to replace your current vehicle if it was totaled in an accident .
We wish more people would purchase life insurance. Even a small policy that covers funeral expenses is better than nothing. Underinsurance isn’t the biggest issue in life insurance — it’s convincing people the policy is needed at all.
But once you have life insurance, it is possible to over insure. A good life insurance policy should cover necessary expenses — funeral, college, mortgage, etc — when you die. What it should not do is make someone a millionaire several times over just because you died – at least not for the average person. A good “rule of thumb” is that you should have life insurance worth 10-12 times your annual income.
Being underinsured can be financially devastating. Being overinsured wastes your money which could be better spent or invested in other ways. If you’re not sure if you have the right amount of insurance coverage, contact Charlotte Insurance today. We can help you understand the policies you have — and what you need.