Adequacy Of Coverage

AAA

DEFINITION of 'Adequacy Of Coverage'

The adequacy of coverage concerns how well your insurance policies protect your assets against unforeseen losses. In order to evaluate the adequacy of your insurance coverage, you should consider many different loss scenarios and judge whether your insurance deductibles and limits are sufficient.


The concept of adequacy of coverage is subjective, and largely depends on one's propensity to take on risk rather than pay higher insurance premiums. One's ability to absorb losses should also be considered, as a person with very few liquid assets will be unable to pay large deductibles or sustain other uninsured losses. Alternatively, those with substantial assets may wish to obtain higher limits to their coverage to avoid losing the wealth built up over many years.

INVESTOPEDIA EXPLAINS 'Adequacy Of Coverage'

When considering adequacy of coverage a four-squared matrix can be used as a rough model for dealing with the four main types of losses:

1) Frequent expensive losses - avoid these high-risk behaviors because insurance will be very expensive.

2) Frequent inexpensive losses - self-insure for these losses by planning ahead and setting aside funds.

3) Infrequent expensive losses - buy insurance for these losses.

4) Infrequent inexpensive losses - self-insure, these losses are no big deal.

RELATED TERMS
  1. Medicare Doughnut Hole

    A range of total prescription drug spending in the Medicare Part ...
  2. Without Evidence of Insurability

    The ability to acquire a policy, such as life or health insurance, ...
  3. Wholesale Insurance

    Coverage for employer groups that are too small to qualify for ...
  4. Air Cargo Insurance

    A type of insurance policy that protects a buyer or seller of ...
  5. Umbrella Personal Liability Policy

    A type of insurance policy that provides excess coverage above ...
  6. Bridge Insurance

    Insurance coverage for bridges. This type of insurance covers ...
RELATED FAQS
  1. Why would a growth investor purchase shares of companies in the drug sector?

    The drug sector – particularly its newer, more high-tech biotechnology segment – offers stronger returns than the broader ... Read Full Answer >>
  2. What is a good annual return for a mutual fund?

    A "good" annual return on a mutual fund can only be gauged in a relative sense, influenced primarily by the investment goals ... Read Full Answer >>
  3. What does a high equity risk premium signify about a company's stock future?

    A high equity risk premium signifies that a company's stock future is uncertain. Equity risk premium is the excess return ... Read Full Answer >>
  4. What are examples of the largest companies in the insurance sector?

    In the United States, the two largest life insurance companies, in terms of assets as of 2015, are Metlife and Prudential ... Read Full Answer >>
  5. When should I use a trailing stop order?

    Trailing stop orders are used to limit losses and protect profits on a stock position. You should use trailing stop orders ... Read Full Answer >>
  6. What impact have terrorist attacks had on the insurance industry?

    Terrorism has led to massive losses for the insurance industry. The attacks on Sept. 11, 2001 totaled $31.6 billion in costs ... Read Full Answer >>
Related Articles
  1. Insurance

    15 Insurance Policies You Don't Need

    Learn how to save money by saying "no" to unnecessary coverage.
  2. Home & Auto

    Fighting The High Costs Of Healthcare

    If your employer is cutting medical benefits, a health savings account may be right for you.
  3. Retirement

    Variable Vs. Variable Universal Life Insurance

    Do you know why you might need one policy versus the other? Read on to find out.
  4. Insurance

    What Does Medicare Cover?

    Don't assume you're insured. Find out what you can expect from this healthcare program.
  5. Home & Auto

    Long-Term Care Insurance: Who Needs It?

    No one is immune to the possibility of one day needing long-term care - and the costs can deplete a life savings.
  6. Options & Futures

    Top Tips For Cheaper, Better Car Insurance

    Accident, theft, vandalism - make sure your coverage will protect you when you need it most.
  7. Insurance

    Life Insurance: Putting A Price On Peace Of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  8. Insurance

    Explaining Insurance

    Insurance is a form of contract between an individual and an insurance company that spreads risk in exchange for premium payments.
  9. Investing Basics

    How to Calculate Risk Premium

    Think of a risk premium as a form of hazard pay for risky investments.
  10. Investing Basics

    Understanding Risk-Return Tradeoff

    The essence of risk-return tradeoff is embodied in the common phrase “no risk, no reward.”

You May Also Like

Hot Definitions
  1. Standard Error

    The standard deviation of the sampling distribution of a statistic. Standard error is a statistical term that measures the ...
  2. Capital Stock

    The common and preferred stock a company is authorized to issue, according to their corporate charter. Capital stock represents ...
  3. Unearned Revenue

    When an individual or company receives money for a service or product that has yet to be fulfilled. Unearned revenue can ...
  4. Trailing Twelve Months - TTM

    The timeframe of the past 12 months used for reporting financial figures. A company's trailing 12 months is a representation ...
  5. Subordinated Debt

    A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. Also known ...
  6. International Financial Reporting Standards - IFRS

    A set of international accounting standards stating how particular types of transactions and other events should be reported ...
Trading Center