Underinsurance

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  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. Insurance

    A contract (policy) in which an individual or entity receives ...
  5. Premium

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

    A guarantee by the Federal Deposit Insurance Corporation (FDIC) ...
RELATED FAQS
  1. How do I change my contingent beneficiary?

    Keeping your beneficiary designations up to date is an important aspect of comprehensive estate planning. Listing a primary ... Read Full Answer >>
  2. What's the difference between a collateralized debt obligation (CDO) and a collateralized ...

    A collateralized mortgage obligation, or CMO, is a type of mortgage-backed security (MBS) issued by an lender that handles ... Read Full Answer >>
  3. If both the primary and contingent beneficiaries are unavailable, what happens to ...

    One of the most common mistakes in estate planning is not keeping beneficiary designations up to date on life insurance policies ... Read Full Answer >>
  4. What types of insurance policies have contingent beneficiaries?

    A contingent beneficiary is a person designated to receive the benefits of an insurance policy or retirement account if the ... Read Full Answer >>
  5. Under what circumstances will a contingent beneficiary receive an insurance payout?

    A contingent beneficiary is someone who receives the proceeds of an insurance policy if the person named as the primary beneficiary ... Read Full Answer >>
  6. Do contractors require subrogation clauses for their contract workers?

    Contractors often require subrogation clauses for their contract workers. To prevent a building owner's insurance company ... Read Full Answer >>
Related Articles
  1. Home & Auto

    How An Insurance Company Determines Your Premiums

    Find out how insurers use credit history to build an insurance score and how it could affect your bottom line.
  2. Insurance

    15 Insurance Policies You Don't Need

    Learn how to save money by saying "no" to unnecessary coverage.
  3. 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.
  4. Options & Futures

    Top Tips For Cheaper, Better Car Insurance

    Accident, theft, vandalism - make sure your coverage will protect you when you need it most.
  5. 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.
  6. Economics

    What is Adverse Selection?

    Adverse selection occurs when one party in a transaction has more information than the other, especially in insurance and finance-related activities.
  7. Insurance

    Homeowners Insurance Losers: States That Pay Most

    Which states charge you the most for homeowner's insurance? Hint: They're regularly featured on the Weather Channel.
  8. Insurance

    Life Insurance: How Much Does Age Raise Your Rate?

    If you need life insurance, try to get it before your next birthday. Here's why.
  9. Insurance

    What Happens If Your Insurance Company Goes Bankrupt?

    When insurance companies go bankrupt or face financial difficulty, it's bad news for policy holders.
  10. Insurance

    Which States Have the Cheapest Home Insurance?

    You can't choose where you live by its insurance rates. But if you did, these are the states to pick.

You May Also Like

Hot Definitions
  1. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  2. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  3. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  4. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  5. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
Trading Center