Imagine going to make a disability insurance claim and finding out that you’ve been paying into an insurance plan for years that you can’t actually use. And worst of all, there’s nothing you can do about it.
Believe it or not, that is entirely possible if you are “over insured”.
Being over insured may not sound like a bad thing.
After all, insurance can protect you and your family from the devastating effects of a critical illness, job loss, or disability, and help you leave a tax-free legacy to your loved ones.
But you could inadvertently be paying for insurance you’ll never be able to use.
Instead of putting that money towards retirement, purchasing a cottage, or a dream vacation, your hard-earned money could be going into the deep pockets of your insurance providers with no benefit to you.
How is that possible?
When it comes to disability insurance, there is often an “all sources maximum” that typically represents about 85% of your pre-disability income. This so-called maximum is just that: the absolute maximum you can receive from all your plans.
What happens if your combined policies go above that maximum?
When you go to make a claim, one of your plans will simply reduce to ensure you don’t go above the maximum.
In other words, you would not receive the full benefit that you’ve been paying for all along.
And because the all sources maximum is likely part of your contract (you know, the one you signed when you signed up for the policy!) you won’t be refunded the difference.
It would be infuriating to realize that you hadn’t needed to be paying out that money after all.
But insurance coverage can get tricky, especially when dealing with group plans.
Is there ever a time being over insured is a good thing?
Yes.
For example: if you are currently on a group plan through your employer but will be leaving your employer in the near future. If you apply for additional, guaranteed-benefit insurance now, it will be based on your current income (which you have proof of extending back several years), and current age and health. Applying for this coverage now would effectively lock in your insurability.
That would mean that even when you leave the group plan you aren’t left with a concerning insurance gap and aren’t stuck applying for new coverage without proof of income.
So yes, while there are circumstances where being over insured can be an advantage, it can also be a disappointing waste of money.
Working with an advisor can mean the difference between strategically over-insuring yourself to lock in the best coverage and wasting your money on coverage you can’t access.
Book a call to go over your current insurance coverage and be sure you’re only paying for exactly what you need.