Today we hear a lot about “minimal coverage” or “lowest coverage allowed by law” in TV commercials for auto insurance. For individuals who need to be “legal for less” minimal coverage fills a need in the marketplace. But, unfortunately, “you get what you pay for” also applies. Most consumers want minimal coverage when they are paying their insurance premiums but comprehensive coverage when they file an insurance claim.
Comprehensive coverage by definition is insurance coverage that covers the insured completely. The coverage would be broad and inclusive covering most of the lost or covering a portion of all the items lost. The TV commercials referred to above illustrate minimal coverage in automobile insurance but minimal coverage could also apply to other types of insurance such as homeowners or health insurance. Minimal coverage would be narrow and incomplete. These types of policies feature lower premiums but also reduced benefits. A smaller investment on the front end results in a smaller payout on the back end usually just at a time when the policyholder needs it the most.
An insurance policy with comprehensive coverage would perhaps have slightly higher premiums but would also pay higher benefits at the time of a loss such as a car accident, serious illness or devastating home fire. Imagine calling the insurance agent the morning after one of these events and the agent says, “Yes, that’s covered.” Then the policyholder would be very glad they purchased comprehensive coverage.
The whole point of insurance is to spread out the risk of a potential loss. If a person can afford to replace a car, a house or pay the hospital bill in full when something dire happens, then they don’t need insurance. Most people must have a mortgage to pay for the cost of a home over time. They must have a car loan to pay the cost of a car over time. Most people also need insurance to spread out the risk of losing these big ticket items that have taken them so long to acquire.
Unfortunately, most people don’t realize how much is at risk until they experience a devastating event. In 2005, Harvard University published their findings on the reasons for bankruptcies in America. Their researchers found that 50% of all bankruptcies were caused by a medical crisis. Seventy-five percent of those medical bankruptcies were to families with health insurance. Most financial advisers are now suggesting their clients have an emergency fund equal to twelve months of their income.
In lieu of a fully funded emergency fund, individuals and families need to make sure they are covered by a comprehensive policy even if it is a little more expensive. When considering the cost for medical insurance for instance, the consumer needs to balance the cost with how comprehensive the coverage would be in the event of a major health crisis. Supplemental health coverage may even be needed to fill the gaps in major medical insurance and thus provide comprehensive coverage. The same advice applies to property and casualty insurance to cover a home or auto.
If you can’t afford to replace it, you can’t afford not to have it fully insured with a comprehensive insurance policy. Minimal sounds like a good deal until you are faced with a comprehensive claim.