Underinsurance

What Does Underinsurance Mean?

Underinsurance refers to having insufficient insurance coverage, meaning it does not fully cover the potential value of claims. As a result, in the event of a claim, the policyholder may experience financial losses since the damages could exceed the amount payable by the insurance company. While underinsurance may lead to lower premiums, the economic losses incurred from a claim can significantly outweigh the initial savings.

Insuranceopedia Explains Underinsurance

In certain situations, underinsurance might be a practical choice. For example, a homeowner in an area with a low risk of tornadoes may decide to forgo full tornado coverage or opt for minimal coverage under their policy. However, underinsurance can also result in significant financial challenges, depending on the value of the asset and the extent to which damages exceed the coverage amount. For instance, if a fire destroys a home insured for $150,000 with a $10,000 deductible, and the replacement cost is $250,000, the homeowner would need to cover $110,000 out of pocket.