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Why Are People Underinsured?

With all the risks involved, why are so many people still underinsured? The most compelling answer is understandable-money. More coverage costs more money, which leaves consumers with the tough choice of living with inadequate insurance coverage or straining their budgets to the breaking point. This and other reasons for living underinsured are outlined below.

  1. Fear of higher premiums. The aversion to paying higher premiums for better coverage is a rational one. After all, a disastrous event that forces you to make a claim may never happen, but your premiums are guaranteed to happen every year. However, most Americans don't realize that they can purchase additional protection for only a marginally higher cost because of the highly competitive market.
  2. Bad advice. Depending on whom you ask, you can get some unbelievably inconsistent advice on how much coverage you need. Who are the people most likely to tell you you're underinsured? Agents and brokers are the worst offenders, as selling you more insurance works to their advantage financially. On the other hand, financial planners and unqualified financial bloggers often advise purchasing too little protection.
  3. Ignorance. Are you certain that you are underinsured? You probably can't answer that question authoritatively, which is more than understandable. This is a complex matter, and the average consumer lacks the knowledge requisite to make informed decisions. When consumers are unaware of their needs, they tend to underinsure themselves.
  4. Self-deception. The advice a financial planner might give you is to buy a cheaper policy and save the difference in the premiums for a rainy day. This way, rather than spending all of your money on pricey premiums for adequate coverage, you have your own savings plan in place to pay for any disasters that occur. The problem with this strategy is that most consumers won't put the money they save on premiums away. They'll spend it and end up with no rainy-day fund and shoddy coverage when disaster strikes.Tree with shadow
  5. Oversimplified heuristics. Did you know that using many of the commonly accepted coverage rules of thumb can leave you underinsured? You see this most often with life insurance. Policyholders go with conventional wisdom and buy a policy worth 6-10 times their annual salaries without realizing the shortcomings of this heuristic. Oversimplified insurance guidelines often fail to consider individual needs, which will invariably lead to an inadequate policy. Take the time to crunch the numbers for your unique situation rather than relying on an over-generalized heuristic.