Can You Be Over-Insured?

How to Tell if You're Over-Insured

To determine if you're over-insured, review your auto, home, health and life insurance and any other coverage. Look at policy amounts, premiums and covered risks to decide if your coverage is adequate or if you have more than you need. Ask yourself the following:

Are Policy Amounts Excessive?

Insurance isn't meant to provide a windfall—it's meant to cover possible risks. Coverage amounts should be based on need. For instance, the financial obligations of most people aren't enough to justify the high cost of a $5 million life insurance policy. To determine how much life insurance you need, use this calculation:

• Add up your outstanding debts. This includes your auto loan, mortgage and personal loans.
• Estimate how much replacement income is needed. Your survivors will likely need to replace your income if you die, but the required amount can vary depending on your personal situation. For example, your spouse might need to replace your full salary while the children are living at home, but won't need as much once they're living on their own.
• Include any other costs you'd like to cover. For example, you might want enough life insurance to pay for your funeral or your children's college tuition.
• Add up your liquid assets. This includes cash, savings accounts, certificates of deposit (CDs) and any investments your loved ones could easily liquidate.
• Subtract the liquid assets from your debts. Use this amount, plus the amount of income you plan to replace and your other costs to estimate how much life insurance you need.

Also remember that it's possible to be over-insured in one area and underinsured—or even uninsured—in another. For instance, you might have auto insurance for every conceivable hazard but have no life insurance or dental insurance. Adjusting areas where you're over-insured can free up money for coverage you lack. An insurance broker or financial advisor can help determine your insurance needs.

Do You Have Duplicate Policies?

You can wind up with doubled-up insurance coverage if you're not careful when buying policies. For instance, you might end up with multiple life insurance policies if you have coverage through your job and from a policy you purchased on your own.

Do You Have Redundant Coverage?

Your insurance may protect against risks that are already covered by other means. Auto insurance policies, for example, often charge for services such as roadside assistance or a free rental car when yours is in the shop. However, if your auto warranty, auto club membership or credit card covers these risks, you're paying unnecessarily.

Could You Pay for the Loss Yourself?

You may not need insurance if you have the financial resources to cover a loss. Standard auto insurance includes collision and comprehensive insurance, which pay for damage to or theft of the vehicle itself. If you have an older car worth only a few thousand dollars and the money to replace it, consider dropping this coverage.

Do You Have Two Health Insurance Policies?

Some people get insurance through both their job and their spouse's job. When you have health insurance policies, one is considered primary and the other secondary. Your primary coverage pays their share of your bills first; then your secondary coverage kicks in. Having two policies may pay more of your bill or cover more conditions. For instance, one policy might cover acupuncture and chiropractic care while the other doesn't. Carefully review your coverage, insurance costs and use of healthcare to decide if the benefits outweigh the extra cost.

Are Premiums Causing a Financial Burden?

A major clue you might be over-insured is that additional insurance coverage and riders are causing an undue financial burden. Overspending on insurance can thwart financial goals like saving for a home down payment, retirement or children's college funds. It can also eat up money you need to build a solid emergency fund.

What to Do if You're Over-Insured

Being over-insured doesn't necessarily require slashing insurance across the board. Instead, look at making adjustments to use your insurance dollars in a smarter way. To reduce insurance costs:

• Adjust your coverage. Reduce policy amounts, cancel unnecessary policies and cut redundant coverage. For example, your home may be over-insured if your coverage is based on the home's market value. Market value is the selling price of your home, which includes your land. Homeowners insurance should cover the cost to rebuild your home's structure, which will be less.
• Raise your deductible. The deductible is the amount you pay before your insurance coverage pays out. Higher deductibles generally mean lower premiums. Keep your deductible at an amount you can comfortably pay, but that isn't so low that it causes your premiums to become unaffordable.
• Ask about discounts. Your car insurance premiums might drop if you're a safe driver, a loyal customer, a good student or turn 55. Adding safety features, installing burglar alarms or modernizing outdated home systems could reduce homeowners insurance premiums.
• Bundle your insurance. Purchasing more than one policy from the same insurance company typically earns a discount.
• Shop around. Compare home and auto insurance rates annually before your policies renew. You can get quotes online or use an insurance broker who sells policies from multiple insurers to find affordable, adequate coverage.

How Can Umbrella Insurance Help?

Insurance needs can change over time. To ensure you're adequately covered without over-insuring, make reviewing your insurance policies part of an annual financial checkup. If you're uneasy about your coverage limits, an umbrella insurance policy lets you access additional coverage when needed at minimal cost.

Umbrella insurance pays for losses outside the limits of your home or auto insurance coverage. For instance, if your auto insurance pays up to $300,000 in liability but you're involved in an accident causing $500,000 in damages to someone else, umbrella insurance pays the $200,000 your auto insurance doesn't cover.

Umbrella insurance typically covers everyone in your immediate family. It may also cover losses that your standard home and auto policies don't. For instance, some umbrella policies cover libel or slander lawsuits or liability for incidents outside the U.S.

You'll generally need a minimum amount of auto and homeowners liability coverage with the same insurer before you can purchase umbrella coverage, which typically starts at $1 million. This amount of coverage averages $150 to $300 per year, the Insurance Information Institute reports. On average, you'll pay $50 for each additional $1 million in coverage.