The Hidden Cost of Being Underinsured
July 25, 2025
Having insurance doesn’t always mean you’re fully protected. Many people assume that once they’ve purchased a policy, they’re covered for whatever life throws at them.
Being underinsured means you have some insurance, but not enough. This can put you at serious financial risk if you face an accident, disaster, or illness. And the worst time to find out you’re not covered is when you need help the most.
Here’s a breakdown of common areas where people often lack adequate coverage, and what you can potentially do to safeguard your finances.
Auto Insurance: Don’t Settle for State Minimums
It’s common for drivers to opt for the lowest required liability limits to save on premiums. But that approach can backfire badly in a serious accident.
Let’s say you cause a crash that injures multiple people and damages an expensive vehicle. If you have a 25/50/25 policy, your coverage may not be enough. This policy covers $25,000 for each person hurt, $50,000 total for each accident, and $25,000 for property damage. Any costs above those limits are your responsibility—and that could mean drained savings, wage garnishment, or even liens on your property.
What to do:
● Increase your liability coverage to at least 100/300/100.
● Add uninsured/underinsured motorist coverage—essential in case you're hit by someone who has little or no insurance.
● Consider umbrella insurance for added liability protection across all your assets.
Homeowners & Renters Insurance: Know What’s (Not) Covered
After a house fire, burglary, or natural disaster, many policyholders are shocked to learn their insurance doesn’t cover nearly as much as they thought. One common trap is “actual cash value” coverage, which only reimburses for the depreciated value of damaged items. That 10-year-old roof? It might be worth next to nothing.
Also, standard homeowners policies don’t include coverage for floods, earthquakes, or expensive valuables like jewelry or rare instruments unless you add specific riders or endorsements. Renters face their own risk—many mistakenly believe their landlord’s policy protects their belongings. It doesn’t.
What to do:
● Opt for replacement cost coverage instead of actual cash value.
● Add separate policies for floods or earthquakes if you live in a risk zone.
● Schedule coverage for high-value items like art, watches, or electronics.
● If you rent, buy renters insurance—it’s often less than $20/month.
Life Insurance: Cover More Than Just Final Expenses
Many people underestimate how much life insurance their family might need. Employer-provided policies usually cover only 1–2 times your salary, but that’s rarely enough to support dependents long-term. A more realistic target is 10 to 15 times your annual income.
And don’t forget stay-at-home parents—their unpaid labor has significant economic value. Life insurance can help cover the cost of childcare, transportation, and more if something happens to them.
What to do:
● Use an online calculator to estimate your life insurance needs.
● Consider a term life policy—it’s affordable and customizable.
● Review coverage after major life changes (marriage, kids, home purchase).
Disability Insurance: Protect Your Income Stream
Your ability to earn an income is likely your biggest financial asset. Yet many workers skip disability coverage or rely solely on limited short-term policies through work. If an illness or injury prevents you from working for months or years, the consequences can be devastating.
Long-term disability insurance can replace 60–70% of your income if you can’t work—and it’s particularly important for professionals, self-employed workers, or anyone in a physically demanding job.
What to do:
● Check your employer's disability policy for coverage amount and duration.
● If gaps exist, consider an individual long-term policy.
● Look for coverage that includes both illness and injury, and consider own-occupation riders and inflation protection.
Umbrella Insurance: Backup for Big Risks
Umbrella policies provide extra liability protection above your home and auto policies. If you’re sued after a major car crash, dog bite, or accident on your property, an umbrella policy can help cover the gap if the damages exceed your base policy’s limits.
For example, if your homeowner's policy covers $300,000 in liability and a lawsuit awards $1 million, umbrella insurance could cover the remaining $700,000—saving your assets from seizure.
What to do:
● Review your existing liability coverage.
● A $1 million umbrella policy typically costs just $150–$300 per year.
● Make sure you meet minimum coverage limits on your home and auto policies to qualify.
Health Insurance: Know Your Out-of-Pocket Costs
Even with a good health plan, deductibles, coinsurance, and coverage exclusions can add up. High-deductible health plans (HDHPs) may leave you paying thousands out-of-pocket before insurance kicks in. Plus, many plans don’t cover dental, vision, or mental health services.
What to do:
● Understand your deductible, out-of-pocket max, and what’s not covered.
● If on an HDHP, open a health savings account (HSA) to cover qualified expenses.
● During open enrollment, shop around and update your coverage to match your health needs.
Pet Insurance: Cover Your Furry Family
Veterinary emergencies can easily cost thousands. Without pet insurance, that expense lands squarely on your shoulders. Pet insurance can help cover surgeries, chronic illness treatment, and even wellness visits, depending on the plan.
What to do:
● Compare policies for coverage levels, exclusions, and reimbursement rates.
● Enroll pets when they’re young and healthy for better rates.
● Decide whether you need accident-only or comprehensive coverage.
Final Thought: Being Insured Isn’t Enough—Be Properly Insured
It’s not enough to simply have insurance. To truly protect yourself and your loved ones, you need to have the right type and right amount of coverage. Review your policies regularly, consider what’s changed in your life, and fill any gaps before a crisis reveals them the hard way.
Taking these steps now can change a financial disaster into a small problem. It will also give you peace of mind, knowing you are really covered.
Sources:
https://www.fidelity.com/learning-center/personal-finance/underinsured
Disclosure:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.