What can cause underinsurance?

Underinsurance is when a person has an insurance policy for the situation, but the limits of the policy are less than the costs involved. Underinsurance occurs most often in liability claims, but it can just as easily be applied to health insurance, homeowners insurance, and other policies. What causes underinsurance depends on many factors, and can include the economy, where a person lives, and details about the person, home or car.

With car insurance, underinsurance can occur when the insured chooses to purchase the minimum state required coverage. Many times, the minimum requirements fall short of being sufficient to handle a medium or large claim, especially when bodily injury is involved. If you are underinsured in an accident where you are at fault, you will be responsible for paying the difference between your coverage and the actual cost out of your own pocket.

For the homeowner, underinsurance can mean the difference between repairing your home or replacing damaged property. Not having enough insurance to cover the injuries someone suffered on your property could cause you to lose the home in order to pay those costs. Homeowner's underinsurance can be caused by having Actual Cash Value coverage instead of Replacement Cost coverage, or it can result from thing such as excessive claims cost, inaccurate property assessment or home inventory, or even setting deductibles too high to be able to pay out of pocket. In this case, lack of sufficient money to pay the deductible could cause an otherwise good insurance policy to fail.

Living in a rural area versus an urban setting can also lead to underinsurance, primarily in health care. Factors which can lead to rural health underinsurance include a discrepancy between the average rural wage and what a person earns in a metropolitan area, reduction in employment availability in rural areas, and fewer employer benefits offered to people in a rural setting. Similarly, the cost of health care is likely to be higher in a rural setting where fewer patients must brunt the cost of specialized equipment and care facility overhead.