Am I Overinsured? 7 Ways To Reduce Your Insurance Bill

You may have too much insurance if you have high coverage limits or entire policies that you don’t need or are otherwise struggling to keep up with your regular premium payments. There are various steps you can take to make sure your insurance policies are meeting your coverage needs in a cost-effective way and you are saving money on the most important coverage types.

Keep reading to learn more about overinsurance including how common it is and how you can prevent it.

What Is Overinsurance?

In general, overinsurance refers to having more insurance coverage than you need or can reasonably afford. For example, you may be overinsured if your coverage limits are higher than the actual cash value (ACV) of your covered property or you have policies covering risks you don’t face in your day-to-day life, especially when the higher-than-necessary insurance premiums put a strain on your finances.

Is It Common To Be Overinsured?

Research suggests that a significant number of Americans are at risk of being either overinsured or underinsured because they lack a sufficient understanding of their insurance costs and coverage. A 2020 survey found that 20% of respondents didn’t know how much they paid for homeowners insurance, while a whopping 70% were not confident that they knew what was covered by their policy.^[1]

Based on his experience as the managing partner of Jacobs Investment Management, Ryan Jacobs estimates that around 20% to 30% of clients looking for financial advice regarding their insurance policies are overinsured in some capacity.

“This trend is more prevalent among those who have not adjusted their coverage as their life circumstances changed or who have purchased additional policies without fully understanding their existing coverage,” Jacobs said in a message to SmartFinancial.

What Happens if You’re Overinsured?

The main drawback of being overinsured is that it results in you spending more than you need to on insurance, which means you’re effectively losing money that could be spent on other things including other insurance policies.

For example, if your home insurance policy includes every single endorsement your insurance company offers but costs so much that you decide to forgo car insurance, then you may be driving in violation of your state’s laws and going without adequate coverage to protect yourself and others on the road in exchange for extra homeowners coverage you don’t really need.

How Do I Know if I Have Too Much Insurance Coverage?

If you experience any of the following scenarios, you likely have too much coverage:

• More coverage than you need: One of the main examples of overinsurance is having a greater amount of coverage than you realistically need. For example, if you buy a platinum health insurance plan that covers 90% of your medical expenses but are in great health and rarely need to access health care services, then you are probably overinsured since you are paying for the most expensive type of health plan without actually reaping the benefit of having that much coverage.^[2]
• Unnecessary coverage types: Even if you have appropriate coverage limits, you could still be overinsured if you have more coverage types than you need. For example, there’s no need to add rideshare coverage to your car insurance policy if you don’t work for a rideshare service.
• Redundant coverage: If you don’t carefully review your insurance policies, you could end up with overlapping coverage, meaning you are effectively paying for two of the same policy at once. For example, this could occur if you decide to switch renters insurance companies but forget to cancel your existing policy after your new policy takes effect.
• No longer need a certain coverage type: Coverage needs change over time, so you should carefully evaluate whether you need to keep renewing your existing policies or buy certain new policies depending on your circumstances. For example, you generally won’t need to purchase a new term life insurance policy after you retire since you’ll no longer have an income to replace.
• Unable to afford the premiums: No matter how beneficial an insurance policy could be, it may not be worth maintaining if you can’t afford to meet your basic needs after paying for it. For example, if you’re struggling to pay bills because your home insurance premium is so high but the policy includes enough personal property coverage to replace every single item you own, consider trimming down your coverage limit so you have enough to cover only the items you would absolutely need to replace after a covered loss.

What To Do if You’re Overinsured

Taking steps like the following can help you crack down on overinsurance and make sure you aren’t overpaying for the types of coverage you need most:

1. Review your insurance policies carefully so you can identify any unnecessary expenses or overlap in coverage. Consider consulting an insurance agent or financial advisor if you are not confident in your ability to properly analyze your policies on your own.
2. Make sure your home is covered at its replacement cost rather than its (often higher) market value. There’s no need to insure your home at its market value since a home’s market value depends on the value of the land it sits on and its proximity to certain amenities, which aren’t relevant to a homeowners policy that covers the cost of materials and labor to rebuild the home.^[3]
3. Cancel redundant or overly expensive policies and lower coverage amounts for policies you want to keep as necessary.
4. Reevaluate your coverage needs once per year or anytime you experience a major life event so you can continue to adjust your policies and coverage limits as appropriate.^[4]
5. Once you’ve determined what coverage types you do need, shop around so you can make sure you’re getting the best deal. SmartFinancial can help you compare insurance quotes for free in as little as a few minutes.
6. Create an emergency fund so you can raise the deductible on various insurance policies, enabling you to spend less on coverage.
7. Inquire about discounts your insurance company offers. You may be able to save money through actions like bundling policies, installing anti-theft features, going several years without filing claims and more.