DEFINITION of 'Adequacy Of Coverage'

The adequacy of coverage concerns how well your insurance policies protect your assets against unforeseen losses. In order to evaluate the adequacy of your insurance coverage, you should consider many different loss scenarios and judge whether your insurance deductibles and limits are sufficient.

The concept of adequacy of coverage is subjective, and largely depends on one's propensity to take on risk rather than pay higher insurance premiums. One's ability to absorb losses should also be considered, as a person with very few liquid assets will be unable to pay large deductibles or sustain other uninsured losses. Alternatively, those with substantial assets may wish to obtain higher limits to their coverage to avoid losing the wealth built up over many years.

BREAKING DOWN 'Adequacy Of Coverage'

When considering adequacy of coverage a four-squared matrix can be used as a rough model for dealing with the four main types of losses:

1) Frequent expensive losses - avoid these high-risk behaviors because insurance will be very expensive.

2) Frequent inexpensive losses - self-insure for these losses by planning ahead and setting aside funds.

3) Infrequent expensive losses - buy insurance for these losses.

4) Infrequent inexpensive losses - self-insure, these losses are no big deal.

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