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Find the right amount of insurance for you.
Insurance is a crucial tool to prevent a financial crisis if you experience a costly, unexpected event like a car accident or a severe injury. However, having too much coverage can put a damper on your other goals, like saving for retirement or crushing your debt.Â
Some telltale signs you're overinsured include excessive policy amounts, unnecessary coverages and duplicate policies.
Having more insurance may give you a sense of comfort, knowing that you're protecting your assets and your loved ones. But it's equally important to recognize the cost of being overinsured in one area or in general.Â
For instance, suppose you pay a lofty amount to expense your whole life insurance policy with high limits. While this may be feasible for some people, it can be problematic if you only have enough left over to afford a minimum liability car insurance policy.
You can find the sweet spot between being overinsured and underinsured by reviewing your policies to see where you can make adjustments.Â
You should keep your eyes peeled for these four signs when examining your policies for over-insurance.
Say you're mulling over how much coverage you need for your life insurance policy. You may be tempted to buy millions of dollars to ensure your loved ones are taken care of and potentially have some extra.Â
However, if your budget doesn’t allow for leaving a larger inheritance than your beneficiaries require, it's worth doing some calculations to determine how much you actually need for a life insurance policy.
One easy method to determine this is by multiplying your annual income by 10. For example, if you make $80,000 yearly, your policy's death benefit would be $800,000.
You can also use the DIME method — a more thorough way to assess your coverage needs.Â
The sum of those figures will give you a ballpark estimate of the amount your beneficiaries will likely need to sustain their lifestyle after your death.
You can save money by removing coverages you don't need. For instance, you can forgo a flood or earthquake insurance policy if you live in a low to no-risk zone.
Or if you drive an old and low-value car, comprehensive or collision coverage may not be worth the extra cost, especially if you have the means to replace or repair your vehicle.
You may have riders or endorsements in your insurance policy that another policy already covers.
For instance, auto manufacturers and dealers include roadside assistance on their vehicle warranty packages. However, you may be spending extra by leaving this coverage in your auto insurance policy.
Neglecting to keep track of your insurance purchases can result in you paying double for the same policy.
For example, if you purchase a new car or homeowners insurance coverage before your old one ends, you’ll be charged for both policies. If you have multiple active insurances covering the same area, cancel the duplicate insurance immediately.
Each person's insurance needs are unique, but it's important to make sure you're not paying for coverages you don't need. Check out our guides on how much car insurance you need and how much home insurance you need to learn more.Â
While being overinsured is preferable to being underinsured, doing so may hinder your financial goals. If you're overinsured, here are some ways to reduce your coverage and save on costs.Â
One way to avoid being underinsured without becoming overinsured is an umbrella policy.Â
An umbrella insurance policy provides additional liability coverage across your homeowners, auto and even boat insurance policy. It kicks in when you've maxed out your coverage limits on your primary insurance policies. Umbrella insurance also protects against personal injury lawsuits like libel or slander.
The best part? You can pad your policies with a higher coverage limit without spending significantly more. Depending on your insurer, a $1 million umbrella policy may cost you an additional $150 to $300 a year.Â
It's worth noting that insurance companies usually require policyholders to have at least $300,000 in liability coverage on their homeowners insurance policy and $250,000 on their auto insurance policy before they sell you umbrella insurance.
You may be throwing money down the drain if you're paying for more insurance than needed. Reviewing your policies to ensure you have the right amount of coverage can help you curb your costs. Consider speaking to an independent insurance agent or financial advisor who can help you determine your insurance needs and purchase adequate coverage for your situation.
