Underinsured? It's going to cost you more in the long run

When times are tough and you find yourself wanting to cut back on your monthly expenses, short-term insurance payments are often the first to get the chop. However, doing this could cost you much more in the end than if you'd paid your full monthly premiums - here's why.

Insurance covers the cost to repair or replace the insured item should it be damaged or stolen, whether that be items inside your home, on the physical structure of your home or your car.

For instance, a comprehensive vehicle insurance policy would cover your car in the event of accidents, fire, theft, claims from third parties, windscreen and glass repairs, and other events specified on your policy. Each month you pay a premium that 'buys' you this cover for the month ahead.

If a rock flies up from behind a truck and smashes your windscreen, it could cost R700 to replace. But if your vehicle is stolen it could cost R250 000 to replace. You might be able to cover the cost of your windscreen by yourself, but can you cover the cost of replacing your entire car? No, probably not.

In this case, your monthly premium covers you for the windscreen repair, the vehicle replacement and every other incident - big or small - in between.

But when you cut down your premiums, or manipulate your insurance policy in some way to make it more affordable to pay each month, you effectively change the extent of your insurance cover. This normally involves excluding insured events or items from your policy which, although cheaper, leaves gaping holes in your insurance cover.

The result is that should you have to claim, you might just find that you don't have the necessary cover in place to fill those gaps, or your claim amount exceeds the total amount for which you are covered. In both cases you are underinsured, and your insurance won't cover your losses.

Take home cover, for example. If the contents of your home cost R2 million to replace, but you're only insured for R1 million, your insurer will only pay out R1 million in the event that home contents are stolen or damaged. You will have to pay the balance.

Trying to cover the shortfall left by your insurer when you're underinsured can place a significant financial strain on you. It also causes undue stress, especially where your ability to earn an income is impacted (as in car theft) or your ability to keep your family safe (where your home security has been compromised).

To avoid underinsurance:

• Make sure your policy covers everything it should
• Don't leave items off your inventory list
• Don't skimp on vehicle or home security or maintenance measures
• Update your policy every time your insured item/s change
• Review your policy every year to ensure the replacement values are accurate

If you're battling to cover your insurance premiums, speak to your insurer about adjusting your policy. Be honest about your situation to find the best solution that provides adequate cover while remaining affordable.