DEFINITION of 'Underinsurance'

Inadequate insurance coverage by the holder of a policy. In the event of a claim, underinsurance may result in economic losses to the policy holder, since the claim would exceed the maximum amount that can be paid out by the insurance policy. While underinsurance may result in lower premiums paid by the policy holder, the loss arising from a claim may far exceed any marginal savings in insurance premiums.

BREAKING DOWN 'Underinsurance'

Underinsurance can cause a serious financial crisis, depending on the asset that is insured and the extent of the shortfall in insurance. For example, assume a house and its contents are insured against all risks for $250,000, with a deductible of $20,000. It is subsequently destroyed in a fire, but the cost to replace the house and contents amounts to $350,000. The homeowner will have to make up the difference of $100,000 plus the $20,000 deductible from his or her own resources.

  1. Insurance Proceeds

    The benefit proceeds paid out by any type of insurance policy ...
  2. Auto Insurance

    A policy purchased by vehicle owners to mitigate costs associated ...
  3. Insurance Claim

    A formal request to an insurance company asking for a payment ...
  4. Premium

    1. The total cost of an option. 2. The difference between the ...
  5. Insurance

    A contract (policy) in which an individual or entity receives ...
  6. Bank Insurance

    A guarantee by the Federal Deposit Insurance Corporation (FDIC) ...
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