Long-term insurance – covering life, disability, and critical illness cover – is an essential part of financial planning. It provides security for you and your family in the face of unexpected events.
But it is possible to have too much of a good thing.
In this article, we look at what it means to be over-insured, and how you can check if you have more cover than you need.
"Too much of a good thing can be bad. After all, you can drown even in clear, clean, pure water." (J. Grant Howard)
While long-term insurance is important in any financial plan, you may unknowingly be paying for more cover than you need. This is particularly possible if you have more than one policy in place.
This most commonly happens either when someone has both a personal insurance policy and a group insurance benefit through their employer, or they are required to take out insurance to cover a car or home loan. This duplication can lead to unnecessary costs without providing additional benefits, channelling money away from where it could be better used – for example, adding to your investments.
Understanding your cover
As a starting point, it’s important to understand how these different types of policies work.
• Personal insurance is generally something you would take out with the help of a financial adviser. It is designed to cater specifically to your financial needs and circumstances.
• Group insurance is provided by your employer as a benefit. These policies typically offer life cover, disability cover, and sometimes critical illness cover, often at a lower cost than personal policies due to the pooled risk across all employees. By their nature, they are, however, not personalised and may have limited payouts.
• Insurance that you’re required to take out to specifically cover a loan will be a simple life insurance policy to cover the value of the loan.
Where overlap happens
You might assume that having more than one policy means you have double the protection. But this isn’t necessarily the case.
If you have a personal life or disability insurance policy and your employer provides similar cover or you take out another policy to cover a loan, you could be paying for unnecessary duplication. This can happen in several ways:
• Life cover: If your group life cover already provides sufficient payout to settle debts and provide for your dependents, a separate personal policy may not be necessary.
• Disability cover: Some policies pay a lump sum, while others provide income protection. If both your group and personal policies offer the same type of cover, the benefits may not stack as you expect. Particularly in the case of income protection, you can only ever insure a portion of your current salary. If you have personal cover for 75% of your earnings and group cover for 75% of your earnings, for example, they won’t add together. You will only ever get a maximum of 75%, so you are paying for unnecessary duplication.
• Critical illness cover: If both policies include critical illness cover, check if they cover the same conditions. Having overlapping policies could mean you’re paying for cover you don’t actually need
What happens when I retire or change jobs?
It is, however, important to consider that you probably don’t want to rely solely on group insurance. That is because it’s tied to your employment, and if you retire, switch jobs, or your employer changes their benefits, you may lose your group cover.
This can leave you without insurance at a time when obtaining a new personal policy might be more expensive due to age or health considerations. For this reason, while reviewing your cover, it’s important to ensure you have a sustainable long-term plan that remains in place regardless of career changes.
How to assess your needs
To determine whether you are over-insured, consider the following steps:
• Calculate your required cover: Assess your financial obligations, including debt, living expenses, and dependents’ needs, to determine how much cover is actually necessary.
• Review your existing policies: Compare the benefits offered by your personal and group policies to identify any duplication. Bear in mind that extra cover may be justified in certain instances, such as if you have high liabilities or many dependents.
• Understand benefit payouts: Insurance companies may not always pay out in full if multiple policies cover the same risk.
• Speak to a financial advisor: A professional can help you structure your insurance optimally, ensuring adequate protection without excessive costs.
The bottom line
Insurance is meant to provide financial security, but paying for duplicated cover can drain resources unnecessarily. That’s why you should carefully review your personal and group insurance policies to ensure you aren’t over-insured.
By aligning your cover with your actual financial needs and understanding where overlaps occur, you can strike the right balance between protection and cost-effectiveness.
To discuss whether your insurance cover is appropriate, speak to us.
Disclaimer – *The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
© DotNews
