Is it possible to have too much insurance?
They say you can never have too much of a good thing. They’re wrong, especially when it comes to insurance.
Although it’s not nearly as big of a problem as folks who don’t buy enough insurance, here are a number of different examples of people over insuring themselves:
Life insurance
The point of life insurance is to provide your loved ones with a reasonable standard of living should you pass away.
What’s considered “reasonable” depends on a number of different factors, of course. Perhaps your spouse makes very little money. Naturally, you’d insure your life for more so your spouse can maintain their lifestyle.
Overzealous life insurance salespeople can use emotion to sell someone far more insurance than they need. Say you want to replace a $50,000 salary for 20 years upon your death. Simple math tells us that would take a $1 million policy.
Anything more than that would be too much insurance. A $2 million policy might make the insured sleep a little better at night, but it would likely just be money washed down the drain.
There are other examples too, like accidental death clauses. It’s a far better idea for the insured to get a blanket policy that covers all forms of death rather than getting one that pays out on something unlikely happening.
Folks who sell insurance say it’s better to have too much insurance than too little. This is true, but there’s still a reasonable limit. It’s better to figure out just how much is enough now, rather than letting someone with a vested interest in selling insurance convince you to purchase too much.
Car insurance
There are a few ways different to buy too much car insurance.
The first is getting talked into anything more than the standard $1 million liability coverage that’s a part of every policy. Certain professions need higher coverage, especially if they drive around clients in the course of doing business. Most people with normal policies don’t need this additional coverage, however.
The second is falling for some of the add-ons available with certain policies. My personal favorite is glass coverage, which, for the price of $250 per year, would cover a new windshield. Meanwhile, a new windshield would cost me about $400. Unless I planned to get a new windshield every year and a half, this would over insure me.
It turns out I made a smart move declining that feature, since I went five years after without having to replace my windshield.
And finally, there’s buying comprehensive coverage for a car that doesn’t need it. It’s silly to spend money on making sure you get a payout if you crash your 1988 Honda Accord with the loose muffler and peeling paint job.
Home insurance
Some people think if you have a home worth $300,000 and you have it insured for $500,000, you’ll get the full $500,000 if the place burns down.
Unfortunately, that’s not true. The insurance company will take a look at the home and cut a cheque for the replacement value of it today, no matter what the amount of coverage is.
All a policyholder gets for over insuring their home is higher premiums without any associated award.
Before you decide on a policy, make sure to review your needs so that you get the right amount of coverage, rather than overpaying for coverage you don’t need.