Describe underinsurance vs overinsurance?

• A. Underinsurance means the policy limit is below the loss value; overinsurance means the limit exceeds value
• B. Underinsurance means the limit exceeds the loss value; overinsurance means the limit is below
• C. Underinsurance means there is no coverage; overinsurance means unlimited
• D. Underinsurance is illegal; overinsurance is prohibited

Answer: (A)

The main idea is matching protection to the value at risk. Underinsurance happens when the policy limit is less than the loss value, so a big loss could leave you paying the difference yourself; you’re not fully protected because the most the policy would pay is the limit. For example, if your property is worth 300k but you only have 200k of coverage, a large loss could leave you responsible for up to 100k.

Overinsurance is the opposite: the limit exceeds the value. You’re paying higher premiums for more protection than you actually need, and when a loss occurs you’re still only paid for the actual loss, not the inflated limit. For instance, insuring a 300k home for 450k won’t lead to a payout of 450k after a loss; you’ll receive the amount of the loss, with the extra coverage just costing more in premiums.

So the described definitions line up with how underinsurance and overinsurance are understood in practice.