Overinsured: How to Know if You Have Too Much Homeowners Insurance Coverage

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Being overinsured is a waste of money, so stop paying premiums for coverage that’s not needed. 

Property owners should buy homeowners insurance coverage to protect their assets. For many people, a home accounts for a significant portion of their net worth, so having enough coverage is crucial to avoid a financial disaster.

But while property owners need enough coverage to satisfy their mortgage lender’s requirements and ensure that their assets are fully protected, buying too much coverage can be a waste of money.

Although it can be hard to determine how much is too much, here are some red flags that suggest a property owner may be overinsured.

Your policy limits are too high

Homeowners who have policy limits that are too high are overinsured and paying more for coverage than makes sense.

Homeowners should have replacement value coverage for both their home and their property within it, and should make sure their policy limits are set high enough to actually pay to rebuild their house and replace its contents if something should go wrong.

But, insurers won’t pay more than the house costs to rebuild or more for the property than it would cost to replace it. So there’s no reason to have policy limits that are in excess of what the home or property’s replacement cost is. For example, if a homeowner has $100,000 of property in the home, it would not make sense to have $200,000 in property damage coverage.

Make sure to get an accurate estimation of the rebuilding cost of the house and the replacement cost of personal property and don’t get a policy with higher limits than necessary.

Your deductible is too low

Homeowners must decide how large they want their deductible to be when they buy insurance on their property. The policy deductible is the money a property owner would need to pay out of their own bank account for a covered loss. Insurance kicks in after the deductible has been met and pays the remaining rebuilding or repair expenses.

Homeowners need an affordable deductible because no one wants to struggle to come up with their out-of-pocket contribution after a covered disaster. But, the lower the deductible, the higher the policy premiums will be. A property owner with a $250 deductible, for example, may be wasting money on more insurance coverage than they need if they could easily cover a $1,000 repair out of pocket.

Switching to a higher deductible policy can provide consistent premium savings. A policyholder can set aside the money they are saving on premiums in a special account to cover their deductible. Once they have enough in that account to pay their out-of-pocket expenses, any additional month they go without a claim is just pure savings.

You have unnecessary riders

Finally, homeowners who have unnecessary riders on their policies are also overinsured. Riders are add-on coverage. For example, some property owners decide to add identity theft insurance to their homeowners insurance policies. But, with strong fraud protections in place by default, identity theft protection insurance is often not worth paying for.

Ultimately, every homeowner should take the time to evaluate their insurance coverage once a year to make sure they are only paying to protect against the risks they truly want to transfer to the insurer. That way, they can avoid paying higher premiums unnecessarily for more insurance than makes financial sense.

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