To ensure your family’s financial security, you need just the right amount of life, funeral, dread disease and disability insurance. But, how do you make sure that you are not under- or over-insured?
According to research data, about 11.5% of people who enrolled in a debt management programme stated that the reason for their debt problems was due to high insurance expenses.
There is no denying that it is critical to have some sort of insurance coverage for different reasons, but does that mean the more policies you sign up for, and the higher the coverage, the better off you are?
The answer is no. If this is what you are currently doing, then you may be setting yourself up for a financial disaster instead when you are not only over-insured, but you are also spending more than you need for your protection.
Being over-insured means that you have cover that you don’t need, and you end up paying more than you should in on your premium.
Here are some signs that point to over-insurance;
When your insurance coverage overlaps
There are many reasons you may have overlapping insurance cover. An example of this is when you have a personal health insurance on top of an employee health insurance. This makes sense if one of them provides a lower coverage while the other one can cover the differences. However, if the policy provided by your employer is adequate, you could be wasting money. It’s time to start re-evaluating your options and whether the choices you make now are good in the long run.
When your cash flow is affected
If your cash flow is being affected due to high insurance premiums, it’s time to take another look at your options. For example, when it comes to life insurance coverage, the general rule of thumb is at least 10 times of your annual income to cover the family expenses for the next 10 years. How much coverage you need really depends on the number of dependents you have and whatever debt commitments you currently hold. If your net worth is going to be higher when you are deceased, then it’s probably time to re-consider your life insurance coverage.
When your coverage is too high
Insurers calculate your premium based on a method called underwriting, where they consider all your risks. If you are a high-risk individual, such as a smoker or work at a high-risk job, your premium will be higher because your chances of making a claim are higher. While it pays to be safe than sorry for things like this, you might be better off tweaking your coverage so that its adequate and suits your lifestyle rather than paying a high premium you cannot afford. For example, if you travel often, get a travel credit card that offers you free travel insurance instead of buying one each time you travel.
You can also avoid situations of over- or under-insurance coverage by completing a financial needs analysis to give you an idea of how much cover you need. This assesses your financial situation, establishes your financial goals and what you need to do to achieve your goals. Once you know these, you can set up plans such as investing a certain amount of money each month or taking out life, funeral and disability insurance. Don’t forget to revisit your financial needs analysis regularly to see what has changed and to make sure that your cover is still adequate and can meet your financial needs.