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Avoiding Over-Insurance

Super size my fast food meal? Yes please! Give me a bigger room at a luxury hotel? You betcha! A huge, luxury car instead of a tiny Smart Car? You know it! These days, no matter where you look, it seems like bigger is always better. If you can get more – then you should. But there is one area where this logic doesn’t hold, and that is in insurance.

As we’ve mentioned before, the goal of insurance is to make you whole after an insurable event. If you own a home and it catches fire, making it no longer inhabitable, the home insurance company is going to give you the amount of money you need to rebuild it or to replace it – as long as you have enough insurance to cover this. But if your home insurance limits are higher than the cost to rebuild or replace your home, then you aren’t going to get the “extra” money. All that happens when you over-insure yourself is that you allow the insurance company to take premium dollars that are not going to be valuable to you in terms of future insurance dollars.

So how do you avoid being over insured? The first way is to have a basic understanding of how much your stuff is worth. This is especially important when it comes to the contents of your home and the value of your car. These items can be valued two ways:

  • Objectively: This means that you have an actual understanding of their book or replacement value based on research and an unbiased consideration of their condition.
  • Subjectively: This means that you LOVE the items and their value – to you – is commensurate with how much you love them rather than how much they would be worth to a third party.

So be objective when putting a value on your things and review your insurance policies every year so you can make sure that you avoid wasting money being over-insured.

January 5, 2011

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