The Hidden Costs of Being Underinsured: Why "Cheap" Insurance Can Cost You Everything

"I'm just looking for the cheapest insurance."

I hear this several times a week. I understand it—insurance feels expensive, especially when you never use it. The temptation to buy the absolute cheapest policy and pocket the savings is strong.

But here's what most people don't realize: the cheapest policy is almost always inadequate. You're not saving money—you're transferring future financial risk from the insurance company to yourself.

And when that risk materializes (an accident, a fire, a lawsuit), the "savings" evaporate instantly, replaced by tens of thousands of dollars in out-of-pocket costs.

At Pinoy General Insurance, we've seen both sides: clients who bought proper coverage and were protected when disaster struck, and clients who bought cheap coverage and lost everything.

This guide explains exactly what "cheap" insurance really costs, how to identify whether you're underinsured, and how to get adequate coverage without overpaying.

What "Cheap" Insurance Actually Means

When someone sells you "cheap" insurance, they're not giving you the same coverage for less money. They're giving you less coverage for less money.

The ways insurance gets cheaper:

1. Lower Coverage Limits

Example: Auto Liability

• California minimum: $15,000 per person / $30,000 per accident

• Recommended: $100,000 per person / $300,000 per accident

• Premium difference: $40-$80/month

The cheap policy saves you $500-$1,000/year. But if you cause an accident with $100,000+ in damages, you're personally liable for the excess.

2. Higher Deductibles

Example: Homeowners

• Low deductible: $1,000

• High deductible: $5,000

• Premium difference: $300-$500/year

The cheap policy saves you $300-$500/year. But if you file a claim, you pay $4,000 more out-of-pocket.

3. Reduced or Eliminated Coverages

Example: Auto Insurance

• Full coverage: Liability + Collision + Comprehensive + Uninsured Motorist

• Cheap coverage: Liability only

The cheap policy saves you $800-$1,500/year. But if your car is stolen, totaled in a single-car accident, or damaged by hail, you get $0.

4. Lower Dwelling/Property Limits

Example: Homeowners

• Adequate dwelling coverage: $550,000 (actual replacement cost)

• Cheap dwelling coverage: $400,000 (saved premium by undervaluing)

• Premium difference: $200-$400/year

The cheap policy saves you $200-$400/year. But if your home is destroyed, you're $150,000 short of the cost to rebuild.

5. Exclusions and Fine Print

Cheap policies often have more exclusions, stricter claim requirements, and less favorable terms. You won't know this until you file a claim and it's denied.

Real Stories: What Being Underinsured Actually Costs

Story #1: The $15,000 Liability Disaster

Client: 28-year-old Cerritos resident, driving to work

Policy: California minimum liability ($15,000/$30,000) to save $65/month

What happened: Ran a red light and T-boned another vehicle, seriously injuring the driver.

Damages:

• Medical bills: $87,000

• Lost wages (6 months): $35,000

• Pain and suffering: $50,000

• Total: $172,000

Insurance paid: $15,000 (policy limit for single person)

Client's personal liability: $157,000

Outcome:

• Wages garnished at 25% for 12+ years

• Credit destroyed

• Unable to buy a home or qualify for loans

• Declared bankruptcy at age 30

The "savings" from cheap insurance: $65/month × 24 months = $1,560

The actual cost: $157,000 + bankruptcy + ruined credit

Story #2: The Underinsured Home

Client: Cerritos homeowner, 60 years old, retired

Policy: Dwelling coverage of $350,000 (home actually worth $620,000, rebuild cost $580,000)

Why underinsured: Never updated coverage since purchasing the home in 2005. Saved approximately $400/year in premiums.

What happened: House fire, total loss

Insurance payout: $350,000 (policy limit)

Actual rebuild cost: $580,000

Out-of-pocket cost: $230,000

Outcome:

• Client couldn't afford to rebuild

• Sold the land for $180,000

• Paid off remaining mortgage ($120,000)

• Left with $60,000 after 18 years of homeownership

• Now renting in retirement with minimal savings

The "savings" from cheap coverage: $400/year × 18 years = $7,200

The actual cost: $230,000 shortfall + lost home

Story #3: The Missing Uninsured Motorist Coverage

Client: 35-year-old mother of two

Policy: Dropped uninsured motorist coverage to save $18/month

What happened: Hit by an uninsured driver who ran a stop sign. Client suffered serious back injury requiring surgery.

Medical bills: $125,000

Lost wages (1 year recovery): $62,000

Total damages: $187,000

At-fault driver's insurance: $0 (uninsured)

Client's uninsured motorist coverage: $0 (she dropped it)

Outcome:

• Client's health insurance paid $95,000 (after fighting coverage disputes)

• Client paid $30,000 in medical bills out-of-pocket

• Lost $62,000 in wages with no compensation

• Sued the at-fault driver, won judgment for $187,000

• Driver has no assets, judgment is uncollectible

• Client's total loss: $92,000+

The "savings" from cheap coverage: $18/month × 36 months = $648

The actual cost: $92,000+

How to Identify If You're Underinsured

Auto Insurance Red Flags

❌ Your liability limit is $15,000/$30,000 or $25,000/$50,000

This is dangerously low. A single serious accident can easily exceed these limits.

Minimum recommended: $100,000/$300,000 or $300,000 combined single limit

❌ You don't have uninsured/underinsured motorist coverage

15%+ of California drivers are uninsured. If they hit you, your only protection is uninsured motorist coverage.

Recommended: Match your liability limits ($100,000/$300,000)

❌ You dropped collision/comprehensive to save money on a car worth $10,000+

If your car is totaled and you don't have collision/comprehensive, you get $0 from insurance. Can you afford to replace your car out-of-pocket?

Rule of thumb: Keep collision/comprehensive if your car is worth more than 10x the annual cost of that coverage.

Homeowners Insurance Red Flags

❌ Your dwelling coverage hasn't increased in 3+ years

Construction costs have increased 18-25% since 2020. If your dwelling coverage is the same as 2021, you're underinsured by 20-30%.

Action: Request a replacement cost evaluation and update your dwelling coverage.

❌ Your dwelling coverage is less than 80% of your home's replacement cost

Most policies have a "coinsurance clause" that penalizes underinsurance. If you're insured for less than 80% of replacement cost, the insurance company will only pay a percentage of claims—even for partial losses.

Example:

• Replacement cost: $500,000

• Your coverage: $350,000 (70% of replacement cost)

• Fire causes $100,000 in damage

• Insurance pays: $70,000 (70% of the claim because you only carried 70% of required coverage)

• You pay: $30,000 out-of-pocket

❌ You have "actual cash value" coverage instead of "replacement cost"

Actual cash value pays the depreciated value of damaged items. Replacement cost pays to replace them with new equivalents.

Example:

• Your 10-year-old roof is damaged (replacement cost: $15,000)

• Actual cash value payout: $7,500 (50% depreciation)

• Replacement cost payout: $15,000

• Difference: $7,500 you pay out-of-pocket with ACV coverage

❌ You don't have flood or earthquake coverage in a moderate-risk area

Standard homeowners policies exclude floods and earthquakes. If you're in a flood zone or earthquake area and don't have separate coverage, you're completely exposed.

Life Insurance Red Flags

❌ You only have coverage through your employer (typically 1-2x salary)

If you earn $75,000 and have $150,000 in employer coverage, that's only 2 years of income replacement. Most families need 10-12x annual income.

Recommended: $750,000-$900,000 for someone earning $75,000

❌ You have no life insurance but others depend on your income

If you die, how will your family pay the mortgage, childcare, living expenses?

Action: Buy term life insurance immediately. It's affordable ($40-$80/month for $1 million in coverage for a healthy 35-year-old).

The Right Way to Buy Insurance: Coverage First, Price Second

Here's the process we use at Pinoy General Insurance:

Step 1: Determine Adequate Coverage

Before looking at price, determine what coverage you actually need:

Auto:

• Liability: $100,000/$300,000 minimum ($250,000/$500,000 if high net worth)

• Uninsured motorist: Match liability limits

• Collision/comprehensive: Based on vehicle value

• Medical payments: $5,000-$10,000

• Deductibles: $500-$1,000 (what you can afford in an emergency)

Homeowners:

• Dwelling: Current replacement cost (not market value)

• Personal property: 50-75% of dwelling

• Liability: $300,000 minimum

• Deductible: $1,000-$2,500 (what you can comfortably afford)

• Additional coverages: Flood, earthquake (if needed), sewer backup, water backup

Life:

• Coverage amount: 10-12x annual income

• Type: Term life for most people (20-30 year term)

Step 2: Shop Multiple Carriers for That Coverage

Once you know what coverage you need, get quotes from 3-5 carriers for identical coverage.

This is where price shopping makes sense—comparing apples to apples.

Step 3: Look for Discounts

Apply all available discounts:

• Multi-policy bundling

• Good driver

• Home security systems

• Claims-free history

• Defensive driving courses

• Professional associations

Step 4: Adjust Coverage Strategically (If Needed)

If adequate coverage is genuinely unaffordable, make strategic adjustments:

Smart adjustments:

• Increase deductibles (if you have emergency savings)

• Drop collision/comprehensive on old vehicles (worth less than $3,000)

• Bundle policies for discounts

• Improve credit score to lower rates

Dangerous adjustments (avoid these):

• Reducing liability limits below $100,000/$300,000

• Dropping uninsured motorist coverage

• Undervaluing dwelling coverage

• Dropping life insurance

Step 5: Review Annually

Insurance needs change. Review coverage every year and adjust as needed:

• Income increased? Increase liability limits and life insurance.

• Home value increased? Increase dwelling coverage.

• Paid off your car? Consider dropping collision/comprehensive.

• New child? Increase life insurance.

How Much Should You Actually Spend on Insurance?

General guidelines for California families:

Auto insurance:

• Single vehicle: $100-$200/month for full coverage

• Two vehicles: $180-$350/month

• Add teen driver: +$150-$300/month

Homeowners insurance:

• $100-$250/month depending on home value and coverage

Life insurance:

• $40-$100/month for $1 million term coverage (healthy 30-40 year old)

Total insurance budget for typical family:

• $400-$800/month (auto + home + life)

• Approximately 5-8% of gross household income

If you're spending significantly less, you're likely underinsured.

What to Do If You Discover You're Underinsured

Immediate Actions:

1. Call your insurance agent today

   • Request a coverage review

   • Ask for quotes to increase limits to adequate levels

2. Don't cancel current coverage

   • Never let coverage lapse while shopping for better options

   • Gaps in coverage can increase future premiums

3. Get multiple quotes for adequate coverage

   • Compare what proper coverage actually costs

   • You may be surprised—it's often more affordable than expected

4. Make the switch

   • Increase coverage with your current carrier, or

   • Switch to a new carrier offering better coverage at competitive prices

Long-Term Strategy:

• Review policies annually (set a calendar reminder)

• Update coverage after major life events (marriage, new car, home renovation, new child)

• Work with an independent agent who can compare multiple carriers and recommend adequate coverage

How Pinoy General Insurance Can Help

We're not here to sell you the cheapest policy. We're here to protect you properly at a fair price.

When you work with us:

✅ We identify the coverage you actually need (not just the minimum)
✅ We quote 15+ carriers to find you the best price for that coverage
✅ We explain trade-offs clearly (what you save vs. what risk you accept)
✅ We review your policies annually to ensure you stay properly protected
✅ We're local (Cerritos office at 17304 Norwalk Blvd) and accessible

Free coverage review—no pressure to buy:

📞 Call: (562) 402-1737
📧 Email: info@pinoygeneralinsurance.com
📍 Visit: 17304 Norwalk Blvd, Cerritos, CA 90703
🌐 Online: pinoygeneralinsurance.com

We'll review your current coverage, identify gaps, and show you what adequate protection actually costs. If you're already properly covered, we'll tell you. If you're underinsured, we'll explain your options clearly.

Final Thoughts

Insurance exists for one reason: to protect you from financial catastrophe.

"Cheap" insurance that doesn't actually protect you defeats the entire purpose.

Yes, insurance costs money. But being underinsured costs more—sometimes everything you've worked for.

The goal isn't to spend as little as possible on insurance. The goal is to spend what's necessary to protect yourself properly, then find the best price for that protection.

That's not the cheapest insurance. That's the smartest insurance.

And that's what we help Cerritos families buy every day.

About the Author:

Felix Lopez is a licensed insurance agent and business development manager at Pinoy General Insurance Services in Cerritos, California. Since 1993, Pinoy General Insurance has been helping families understand the true cost of underinsurance and secure adequate protection.