Underinsurance simply means not having enough insurance. Having enough insurance is not equivalent to not experiencing the mishaps of life but it eases the financial burden in such times. In other words, being underinsured would make the insured feel the full blow of these mishaps.

No matter the life mishaps (diseases, fire, accident, illness, etc) your insurance should be able to cover so much that your finances would not be visibly affected if you pay whatever is remaining.

For example, if Mr. John owns insurance of $250,000 on a house whose repair in the event of a crisis would cost $400,000, Mr. John is underinsured because he would have to pay the remaining $150,000 from his pocket which may affect his finances at that moment.


Effect of underinsurance

Being underinsured could also mean a policy that includes exclusions and gaps, or it also means that the payout of your policy is less than the amount of the claim. Sometimes you may be offered a lesser monthly premium payment but then it would also affect the amount of benefit you are liable to receive which may leave you underinsured thereby leaving you open to feel the full brunt of the financial burden should there be a mishap.

Generally, underinsurance can expose you to financial should your claim exceeds the payout.

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Underinsurance and health insurance

Although there is an increase in the number of adults who has health insurance in recent times, there is also a significant increase in underinsurance of health plan in these adults.

Being underinsured may make people overlook important health necessities (avoiding the services of a doctor in the time of sickness, jumping some test or necessary treatment, not taking their drugs prescriptions) because of the cost of acquiring them.

If one’s deductible or out-of-pocket health care expenses is above 5% of their annual income, then such persons are considered underinsured. Most people whose health insurance is funded by their employers are underinsured.

One can choose between purchasing a health insurance plan with a low premium which comes with high deductibles and other payments, or a comprehensive plan which comes with a high premium but low deductibles. Some people go with the former thereby leaving them underinsured.

Underinsurance vs, short-term health insurance

Originally, short-term health plans were recommended for people who have temporary coverage gaps but in recent times, anyone can opt to buy short-term health insurance and then increase the length of time during the renewal of the policy. These plans are usually less expensive than the lowest of the regular health insurance plan, but also sometimes doesn’t contain the necessary coverage such as mental rehabilitation cost, maternity care, treatment of substance abuse, etc.

Some people tend to choose short-term health insurance plans over regular insurance comprehensive plans to save cost even if it doesn’t provide the necessary coverage.

Read Also: A complete guide to what is an Insurable interest!

Avoiding underinsurance in a healthcare plan

  • It is best to opt for more comprehensive coverage if you have a serious health condition 
  • If your health is in good condition, you can opt for a low premium but high deductible coverage to save on cost
  • Even while paying your premiums, save up money for the cost of the deductible and other expenses that may be necessary for adequate health care.
  • If you are under an employer-funded insurance plan, you can also buy some add-ons to cover up any gap that may be present.
  • Avoid short-term health insurance plans, as most of them do not cover some necessary healthcare you may need plus they may have a high deductible.
  • When choosing a health insurance plan, endeavor that it is not just affordable but comprehensive enough for your needs.
  • Don’t be in a hurry to sign your policy, Endeavor to read and understand the terms of agreement of your policy and make sure it aligns with your needs.

What causes underinsurance?

Lack of benefits in the health insurance plan can also lead to underinsurance. As insurers have decreased costs (in terms of actuarial value and premiums) by eliminating some benefit types, comprehensive coverage has become less common.

What is the difference between over-insurance and under-insurance?

Underinsurance: The opposite of over insurance is underinsurance. This occurs when a home insurance policy’s building sums are less than the cost to rebuild the insured property.
Over insurance: When a policyholder covers their house for more than what it would cost to replace it, this is known as over insurance.