What is "underinsurance"?

"Underinsurance" refers to a situation where an individual or entity has chosen an insurance coverage amount that is insufficient to fully protect their assets or meet potential liabilities. This scenario can lead to significant financial losses when a claim is filed, as the insured may not receive enough compensation to cover their losses or restore their assets to their original value.

For example, consider a homeowner whose property is valued at $500,000 but only has a policy covering $300,000. In the event of a total loss due to a fire, the homeowner would be underinsured, resulting in a gap of $200,000 that the insurance would not cover. This can leave the insured at a severe financial disadvantage, highlighting the importance of accurately assessing insurance needs in relation to actual asset values. Proper coverage ensures that one can recover fully without incurring additional out-of-pocket expenses beyond their means.

The other choices do not accurately define "underinsurance." Having too much coverage does not relate to underinsurance but rather to overinsurance, while the absence of a health insurance policy describes a lack of coverage, not insufficient coverage. Finally, having a policy cover only specific items refers to limited coverage rather than the broader concept of underinsurance.