Is There Such a Thing as Having Too Much Insurance?

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  • Having enough insurance is crucial to protect assets.
  • It's possible to have too much insurance, and buying unnecessary coverage leads to wasted premiums.

Buying enough insurance is crucial. Without the right coverage in place, a disaster could quickly drain a person's bank account and leave them without the funds they need to rebuild or restore themselves to the position they were in before tragedy struck.

But, while everyone needs to make sure they have enough insurance -- including car insurance, home insurance, and life insurance -- it's important not to go overboard either. Having too much insurance can be a bad financial choice.

The downsides of having too much insurance

Having too much insurance may seem like a good problem to have, but that's not necessarily the case.

For one thing, an insurance company isn't going to pay out more than a claim is worth. This could be an issue for things like home or auto insurance. A homeowner who has a policy with $300,000 of coverage for personal property but who only owns $100,000 of personal property is paying for added protection they aren't really getting. If their property is destroyed, the insurer is going to want to see an inventory and receipts to estimate the value of their items and will only pay out what it would cost to replace property they actually had.

A second issue is that buying more insurance than needed comes at a big cost since premiums go up when the policy limits increase and when additional types of coverage are added. A driver who pays for roadside assistance coverage who already has AAA is really just wasting money on this unnecessary protection. They're paying higher car insurance premiums for a kind of coverage that doesn't offer them any actual value.

How to determine how much insurance is enough

Since it's silly to pay higher premiums for unnecessary insurance coverage or insurance coverage that doesn't even really provide added protection, it's important to think about how much insurance coverage is actually needed.

First, consider the value of the property that is being insured. Whether it's a car, house, or personal property, it's possible to estimate how much it is worth. Make sure policy limits on an insurance policy don't exceed the amount the insurer would pay based on the value of the property that is being insured.

Second, think about what is actually being purchased when buying insurance coverage. A policyholder purchasing protection does so in order to transfer the risk of loss to an insurer. It makes sense to transfer the risk of certain kinds of losses -- like a totaled vehicle -- to an insurer. But it doesn't make sense to transfer the risk of very minor losses or to transfer risk when there would be no actual loss at all.

By taking the time to consider these issues, insurance buyers can avoid getting either more coverage than they need or higher policy limits than they would really require. They can pay premiums only for protection that is valuable to them and can make sure they are protected from serious risks while avoiding enriching an insurance company for no reason.

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