When it comes to insurance, most guys fall into one of two camps. There are the “Penny Pinchers,” who try to get the lowest possible premium by undervaluing their stuff. Then there are the “Play-it-Safers,” who throw big numbers at the policy just to be sure.
But like a well-tailored suit, insurance works best when it fits perfectly.
Today, we are looking at the difference between being Under-Insured and Over-Insured. While neither is ideal, one is a nuisance, and the other is a disaster waiting to happen.
The Danger Zone: Under-Insurance
We spoke about the concept of average where underinsured plays a big roll: [last week’s blog about the Principle of Average], so we won’t bore you with the math again.
But here is the recap: Under-insurance is when you insure your R200,000 belongings for only R100,000.
You might save a few bucks on your monthly premium, but you are effectively shooting yourself in the foot. If you claim, the insurer applies “Average” and only pays out a fraction of the claim. You save R50 a month now to lose R50,000 later. It’s bad business.
The Wasteful Safety Net: Over-Insurance
Over-insurance is the opposite. This is when you insure that R10,000 lounge suite for R20,000, thinking, “If it gets stolen, I’ll make a profit!” or simply because you haven’t checked the value in years.
Here is the hard truth: Insurance is designed to put you back in the position you were in before the loss. It is not a lottery ticket. You cannot profit from a claim.
If your R10,000 couch is stolen, even if you insured it for R20,000, the insurer will only pay you the replacement value: R10,000.
The downside? You have been paying higher premiums every single month for coverage you could never actually use. You are essentially tipping your insurance company. (Thanks, but you really shouldn’t).
The Verdict: Which is the “Better” Mistake?
Ideally, you want to be Correctly Insured—paying exactly the right premium for exactly the right cover.
But, if you had to choose an error, it is better to be Over-Insured.
Here is why:
If you are Over-Insured: You have wasted some monthly cash on premiums. That hurts your budget slightly, but your claim will be paid in full (up to the actual value).
If you are Under-Insured: Your claim gets slashed. You could be left with a massive financial hole that you can’t fill.
It is better to “waste” a little money on safety than to face financial ruin when disaster strikes.
How to Get it “Just Right”
You don’t want to burn money on high premiums, and you definitely don’t want the Average formula destroying your payout.
- Stop Guessing: Don’t pull numbers out of thin air.
- Inventory Check: Once a year, walk through your house. Has the price of electronics dropped? (Maybe lower your sum insured). Has the price of furniture skyrocketed? (Raise your sum insured).
- Be Realistic: What does it cost to replace your items new today?
Precision pays off. It ensures you aren’t overpaying every month, but you also aren’t left high and dry when you need us most.
Unsure if your values are too hot, too cold, or just right?
Let’s chat. www.first4men.co.za