4 signs you're overinsured and what to do about it

It's possible to be too protected

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Alani Asis

Alani Asis is a personal finance writer with nearly three years of experience in the space. She has worked with leading publications and brands cover…

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Kristine Lee

Insurance Analyst

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  • Licensed Insurance Agent — Property and Casualty
  • 4+ years of Experience in the Insurance Industry

Kristine is a licensed insurance agent who joined The Zebra in 2019 as an in-house content researcher and writer. Before joining The Zebra, she was a…

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Susan Meyer

Senior Editorial Manager

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  • Licensed Insurance Agent — Property and Casualty

Susan is a licensed insurance agent and has worked as a writer and editor for over 10 years across a number of industries. She has worked at The Zebr…

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. 

Some telltale signs you're overinsured include excessive policy amounts, unnecessary coverages and duplicate policies.

Are you overinsured?

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. 

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. 

4 signs you're overinsured

You should keep your eyes peeled for these four signs when examining your policies for over-insurance.

Your policy limits are excessive

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. 

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. 

  • Debt 
  • Income
  • Mortgage  
  • Education

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.

Understand the DIME method

  • Debt: Add up your outstanding debt, including loans and credit card debt. 
  • Income: Multiply your current annual income by the number of years your dependents will likely rely on your income after you pass. 
  • Mortgage: Figure out the remaining balance on your home loan.  
  • Education: Determine the cost of your dependent's education, including tuition, housing, and materials they’ll need.
You have coverages you don’t need

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 have overlapping insurance coverage

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.

You have duplicate insurance policies

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.

What to do if you're overinsured

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. 

  • Review your policy regularly. Review your policies periodically or when your situation changes and adjust where needed.  
  • Shop around. Policy prices can fluctuate frequently. So, to get the best rates for the coverages you need, compare car insurance rates from different insurers every six months. 
  • Increase your deductible. Choosing a higher deductible can result in lower premiums. But ensure you can pay for the increased deductible if you need to file a claim.
  • Build an emergency fund. A sizable emergency fund can keep you from needing high policy limits or additional riders. 
  • Take advantage of discounts. Most insurance companies offer discounts for good driving, insuring a safe vehicle and even getting good grades in school. You can also score massive savings by bundling multiple insurance products from the same company.

What is umbrella insurance?

One way to avoid being underinsured without becoming overinsured is an umbrella policy. 

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. 

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.

The bottom line

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.