Are You Over Insured or Underinsured?


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Did you know that you can be over insuring, or worse, underinsuring yourself? Find out how to make sure you are getting the right insurance coverage for your needs.

What does being underinsured mean?

This is a situation where your insurance coverage is not enough to pay for your claims. Underinsuring will mean a lower insurance premium, however, remember that this will also mean that as a policy holder, you are at risk of financial losses. Therefore, even though some may think they can save on the amount of premiums paid by under insuring, the loss arising from a claim may far exceed any marginal savings in insurance premiums.

Mobile phone insurance

Mobile device protection is an insurance plan for smartphone owners who want comprehensive coverage against the loss, theft or accidental damage to their smartphones. In Malaysia, you can sign up for smartphone insurance with your current telco provider as currently there are no third-party provider for mobile device insurance. An example of mobile phone insurance by telco providers in Malaysia is the U Care Plus 8 by U Mobile and the Mobisure Insurance from Digi.

Underinsuring your mobile phone means your coverage plan does not cover accidental damage such as water damage.

See also: Smartphone Insurance 101

Mortgage insurance

In Malaysia, there are two types of mortgage insurance which are the Mortgage Reducing Term Assurance (MRTA) and Mortgage Level Term Assurance (MLTA). Mortgage insurance is usually pegged to a mortgage loan. The concept with MRTA is that as your loan balance decreases over time, the sum assured will also reduce, therefore you save on paying the premiums. The premium for MRTA is also cheaper than MLTAs, but the insurance coverage will be tied to the property. As for MLTA, the sum assured is fix, and as such will cost more than MRTA. However, it is transferable and can be transferred to another property.

MLTA can provide security to your loved from being burdened with home loan repayments upon your sudden passing, or if you are afflicted by permanent disability.  However, if you don’t have anyone to leave your property to, or have any dependents, a mortgage insurance does not need to be your priority.

An individual may be underinsured if they take on a lower sum insurance with their mortgage loan thinking they also have an existing life insurance. However, even if you do have a life insurance, it may not be sufficient to cover the cost of the mortgage loan, therefore cost a person to be under insuring their mortgage loan.

Credit card insurance

This type of insurance is to ensure that your credit card balance payment will not burden your dependent upon a critical illness, disability or untimely demise. A person can be deemed as under insured if they have no credit card insurance, as with certain banks it is not compulsory to have credit card insurance. As a result, if the card holder suffers a critical illness or death, his or her family members will have to bear the burden of making payments.

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Life Insurance

Did you know that 90% of Malaysians with life insurance policies are actually underinsured? The rule of thumb for life insurance is for a person, especially a breadwinner, to have insurance coverage that equals 10 times his or her annual income. This is because a higher sum assured protection can at least guarantee the family’s livelihood for the next 10 years.  Therefore, if your life insurance sum is less than 10 times your annual income, you may be underinsured.

Medical Insurance

Underinsuring for medical means it does not provide sufficient medical coverage for the individual. In order to have sufficient medical coverage, it is advisable to get it while you’re young and healthy instead of trying to buy insurance after you’ve been diagnosed with an illness, which will be hard and more expensive.

Car Insurance

A car is considered underinsured if the coverage is below the current market value of the car. If you insure your car at a lower-than-market value, you will then have to pay the difference yourself should you need to make a claim in the event of an accident. Therefore, it’s always best to insure your car at its market value and based on your driving needs.

Travel Insurance

You may be underinsured for travel if your coverage does not cover crucial losses such as lost baggage or theft. Being underinsured can happen as many may overlook the fine print of the insurance policy. Let’s say the travel insurance assured for lost baggage is RM 2,500. It may not cover the actual losses if your lost baggage contains your expensive gadgets like your camera, electronics and other valuables. Therefore, it is wise to check how comprehensive your insurance is to make sure you won’t be under insured.

What does being over insured mean?

An individual is considered over insured when their insurance coverage and premium paid is beyond what is necessary. This means that the insurance coverage is more than what the individual actually needed.

For example:

You buy an insurance policy to cover the cost of your television from breakage or theft for RM5 a day. Let’s say that the television set is worth RM5,000. It may seem like a good deal to you, but how often does your television actually stop working or gets stolen?

Let’s assume your television stops working after five years. Over that five-year duration, you would have paid RM9,125 in premiums for insurance coverage (RM5 x 365 days x 5 years). With that amount, you could have actually bought a new television of the same value, and still have RM4,125 left over. You were clearly over insured.

Mobile insurance

Over insuring for a mobile device can happen if an individual insures their mobile device for more than it is worth. For example, if you have used your mobile device for more than a year, and then only decide to have it insured, it may not be worth it as it would have devalued after a certain time.

Mortgage insurance

The risk of over insuring happens if an individual with a mortgage loan takes on a mortgage insurance, yet already has a comprehensive life insurance. If the life insurance offers a substantial amount, it would be enough to cover the mortgage loan in the event of an untimely death. Types of mortgage insurance can also cause you to over insure. For example, MLTA is a long term coverage, therefore if you plan on repaying the loan amount in a couple of years, MLTA coverage would be over insuring, especially since the premiums cost more.

Credit card insurance

Credit card insurance is usually offered as an additional service by credit card issuers. Unless you work in a very risky occupation, and risk death or disability causing you to be unemployed, and therefore unable to pay off your credit card, getting a credit card insurance itself is over insuring, no matter the amount. This is because a credit card insurance is another way for credit card issuers to make money. Therefore, most consumers do not need a credit card insurance, because even if you become unemployed, you should have some savings that can pay off the minimum amount. Consider your circumstances before deciding on getting a credit card insurance.

Life Insurance

When it comes to life insurance coverage, people may want to make sure they are adequately covered especially if they are the breadwinner of the family. However, if you are taking on a life insurance policy with an expensive premium, and with coverage higher than what your dependents would need in the event of your untimely demise, you might be over insured. As mentioned earlier, the rule of thumb is to have life insurance coverage worth 10 times your annual income. If for example, you take on a life insurance coverage 20 times your annual income, it would be over insuring.

It doesn’t stop there. Upon your untimely demise, your dependents may face trouble receiving the payout because the insurance company may need to open an investigation as to why you insured yourself for such a high amount. Even if there are no findings because there never was any foul play at all for your death, the insurance company may still withhold the insurance pay out while they conduct the investigation. This will be especially problematic for your dependents.

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Medical Insurance

Over insurance of medical coverage happens when an individual’s comprehensive medical insurance coverage is beyond necessary can the benefits of the coverage are not utilized. However, it may also indicate that a person does not understand how to use their benefits properly. One way of assessing your medical insurance needs is to review your spending on medical bills in the last year. How much would you need for in-patient or out-patient treatment? If you think you are paying way too much in premiums per year, reassess your needs.

Car Insurance

If you insure your vehicle at a higher amount than its current market value, the maximum compensation you will receive in the event of an accident is the actual market value of the vehicle, and not the amount you insured it for.

Travel Insurance

Over insuring for travel insurance can happen if the premiums paid and the coverage provided would outweigh the actual value of losses that could happen during the trip. For example, you are a light traveller, yet your travel insurance policy covers an amount of RM7,500. But you only travel with your clothes and toiletries, which barely reaches that value even if you were to lose it. Therefore, value your possessions as accurately as possible before taking on travel insurance.

Why does over insurance or underinsurance happen?

Financially illiterate

Did you know that only 1 in 3 Malaysians are financially literate? As such, underinsuring can happen when one does not understand the insurance policy they are taking on. This is especially because insurance policies can be complex, and is harder to understand when it has additional coverage. For example, a life insurance with medical coverage. One may think they are killing two birds with one stone, however, the death benefit may be low if a policy is taken with medical coverage. Therefore, they may be underinsuring themselves for their untimely demise.

Insufficient planning

When an individual does not plan out their finances well, over insurance and underinsurance can happen. It can happen by way of an insurance overlap, such as when an individual has various insurance policies. This can cause an individual to be over insured. Aside from that, changes in circumstances can also cost a person to be underinsured. Let’s say an individual’s medical insurance has expired. However, the individual would then want to be insured at a later stage, when the premium is more expensive. As a result of the poor financial planning and management, the individual may settle for less coverage because of the lower premium, resulting in underinsuring.

What if I’m over insured because of insurance overlaps?

An insurance overlap can happen in the event of a personal health insurance on top of employee health insurance coverage.

If you have an existing personal health insurance, and as an employee, you are also covered under an employee health insurance, having both health insurance makes sense if one of it has low coverage. Having the other medical plan will then be able to cover the differences in claims should the need arise.

However, if the medical policy provided by your employer is adequate, having another separate policy means you will be adding additional cost to your finances. One option you can opt for in this case of insurance overlap is to lower your coverage to a lower cost of premium instead of cancelling it, as you may change jobs which you would be uncertain of the employee benefits.

In order to make sure you get adequate insurance coverage, regardless of the type of insurance it is, it is important to consider whether the choices you make are good in the long run, and will not cost you more. For example, if you are financially burdened as a cost of high premiums. When taking on an insurance coverage, plan accordingly, and remember that it is not set in stone as you can adjust coverage when necessary as circumstances can change in life.

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