Struggling Consumers Reduce Insurance Coverage to Cut Costs

By Robert Lewis, InsWeb.com

With the U.S. in the midst of a deep recession-and no end in sight-more Americans are cutting back or eliminating insurance coverage to lower expenses. It may save money in the short-term, but is it a risk worth taking?

Many Americans have decided that it is.

As jobs disappear and finances run dry, drivers across the country are reducing coverage to the state minimum or canceling their policies altogether. A study by the Insurance Research Council found a "strong correlation" between the unemployment rate and the amount of uninsured motorists. In fact, for each one percent increase in national unemployment, the level of unemployed motorists rises by three-quarters of a percent.

"An increase in the number of uninsured motorists is an unfortunate consequence of the economic downturn and illustrates how virtually everyone is affected by recent economic developments," said Elizabeth A. Sprinkel, senior vice president of the IRC. "Responsible drivers who purchase insurance end up paying for injuries caused by uninsured drivers."

Today, one in seven drivers is without auto insurance. Without uninsured/underinsured motorist coverage-which covers damage caused by a driver with little or no insurance-the insured driver may be stuck footing the bill for an accident, even if they aren't at fault.

The coverage conundrum isn't exclusive to drivers, though. Consumers are cutting insurance coverage on their homes and rental properties, too-and at the worst possible time.

This year's hurricane season was one of the most active on record, with 16 named storms and five hurricanes reaching Category 3 or higher. Four major storms--Fay, Gustav, Hanna and Ike--threatened the Atlantic coast in a single month. Despite the fact that Hurricane Ike was only a Category 2 hurricane, it will go down as the third-costliest storm in U.S. history.

Obviously, Mother Nature doesn't care that we're in the midst of a global recession.

More recently, wildfires inflicted millions of dollars of damage in Southern California. More than 500 mobile homes and 80 apartments were destroyed in the fires--and not all of them were insured with a home or renters insurance policy. According to analysis from the Sacramento Bee, 25% of mobile homes in California were uninsured in 2007, and a survey from the Insurance Research Council found that less than half of renters (43 percent) carry a renters insurance policy.

According to the National Association of Insurance Commissioners, insurance coverage levels were lacking even before the recession struck, with nearly half of all insurance consumers underinsured for potential losses. If economic conditions continue to deteriorate, the problem will only grow more severe.

Cutting costs is always a sound financial decision, but leaving valuable property unprotected isn't. Furthermore, there are plenty of ways to save on insurance without sacrificing coverage, like raising your deductible or inquiring about discounts.

In the end, scaling back or eliminating necessary insurance coverage is an incredibly risky move, and should only be considered as a last resort. Now more than ever, it's important to review your insurance policies and make certain your coverage levels are adequate.