Underinsuring your assets can result in high out-of-pocket expenditure. Here’s how it can affect your finances and what you can do about it
With the advent of bite-sized insurance policies, you get the option of taking a cover for almost anything and that includes your consumer durables and assets such as televisions, laptops, mobile phones and others. The affordable premiums and easy availability encourage many buyers to consider taking such covers.
The next time you go to replace your mobile phone and the dealer offers you an insurance policy, look at it carefully to ensure you are not underinsured.
Underinsurance is simply having inadequate insurance to cover the costs of an asset in case of damage. Though there is a wide range of life insurance products available in the market, every product is not suited for everyone. If you happen to pick up the wrong product, either you would have to pay a high premium or deal with a lower coverage.
If you’re underinsured, you could have a false sense of safety in your mind about your insurance cover, which is, in a way, worse than not having any an insurance cover at all. This false sense may stop you from keeping aside any savings for the purpose, and when the time arises, paying for the shortfall may dent your finances.
Ideally, you should not wait for any damage or crisis to find this out and should do this much earlier. It would save you from unnecessary trouble in the future.
For instance, if you have insured your television worth Rs 40,000 for a sum insured of Rs 10,000, your asset will be covered in the same proportion, i.e. 25 per cent of the total cost and the rest will have to be borne by you.
Usually, underinsurance is a result of lack of awareness or the influence of agents who misled you into buying a product by not making you aware of less insurance coverage that your policy may entail.
To assess if you are underinsured, it is important to review your insurance cover. A higher cover may entail higher premiums—assess if the higher premiums are worth it or are you ready for out-of-pocket expenditure.
“For home appliances, gadgets, or equipment, whether new or second-hand, the insurance sum will be determined based on the market value of the gadget,” says Jitendra Singh, vice-president, Swastika Insurance Broking Services.
The most common example of underinsurance is in the case of home insurance. Since houses are high-ticket assets, it is essential that you assess the out-of-pocket expenditure when settling down on a cover amount.
You could compare with other products or policies to find this out. If you are unsure yourself, especially in case of high-ticket assets, you could seek advice of a financial planner to help you choose a better insurance policy and sort out your finances.
Asset insurance pays for repairs as well as for replacement. In case of partial loss, the policy typically covers the full cost of the parts, labour charge, air freight, customs duty, and charges for dismantling and re-erection of the gadget, according to Singh.
In case of replacement when there is total loss, the entire value is paid minus the depreciation cost.