What Is Underinsurance?

Underinsurance refers to inadequate insurance coverage held by a policyholder. In the event of a claim, underinsurance may result in economic losses for the policyholder. If a policy is insufficient, 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 policyholder, the loss arising from a claim may far exceed any marginal savings in insurance premiums.

Key Takeaways:

  • Underinsurance is inadequate insurance coverage held by a policyholder.
  • Underinsurance may result in financial hardship for the policyholder because the insurance policy will not provide enough funds to cover the total amount of the loss.
  • There are three types of underinsurance: economic underinsurance, attitudinal underinsurance, and structural underinsurance.

Understanding 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. The house 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 their own resources.

Underinsurance and Health Insurance

In the case of health insurance, according to the Commonwealth Fund, a person is considered underinsured if their out-of-pocket healthcare expenses are between 5% and 10% of their annual income, or if their health plan deductible is more than 5% of their annual income.

A survey by the Commonwealth Fund found that the percentage of adults in the United States without insurance decreased from 20% in 2010 to 12% in 2018. However, the survey found that the percentage of underinsured U.S. adults increased from 16% in 2010 to 23% in 2018.

While there is no single definition of underinsurance as it relates to health insurance. Rather, there are actually three different types: economic underinsurance, attitudinal underinsurance, and structural underinsurance.

  • Economic underinsurance refers to a person’s ability to pay for their healthcare, including the cost of the insurance premiums, co-payments, and deductibles. This definition defines a threshold above which the costs of healthcare become a significant financial burden and interfere with access to care. Usually, this happens when an individual's out-of-pocket expenses for necessary medical care are above a specified percent of that individual’s income, within a given time frame.
  • Attitudinal underinsurance refers to consumers' perceptions, (rather than actual, factual monetary limits) as well as their satisfaction with healthcare. This definition is recognized when at least one healthcare benefit that an individual wants is not covered by their health insurance policy, when there is at least one symptom that requires treatment that is not covered, or when a person is dissatisfied with their insurance plan.
  • Structural underinsurance considers both the type of available benefits and the number and range of providers whose services are covered under a given plan. A structural approach to defining underinsurance uses a benchmark benefits package as a basis for comparison. Structural underinsurance occurs when at least one benefit in the benchmark package is not covered by a policyholder's health insurance plan.

All of these factors should be considered when defining, measuring, and identifying instances of underinsurance as it relates to health insurance.