When is a home considered underinsured?

• A. When it is insured for less than 80% of its value
• B. When it is fully insured
• C. When it has no coverage at all
• D. When it is insured for more than its value

Answer: (A)

A home is considered underinsured when it is insured for less than 80% of its value because many insurance policies use this threshold to determine adequacy of coverage. Insuring a home for at least 80% of its value is crucial because, in the event of a total loss, the homeowner would receive sufficient compensation to rebuild or replace the property. If the coverage is below this percentage, it may result in a significant shortfall in funds needed to fully repair or replace the home, leaving the homeowner exposed to financial risk.

In contrast, being fully insured means the property is covered adequately, aligning with its actual value. Having no coverage at all denotes a complete lack of protection, which doesn't classify as underinsurance but rather lack of insurance. When a home is insured for more than its actual value, it does not reflect an underinsurance situation either; instead, it could indicate an over-coverage scenario, which might not be beneficial in terms of cost-effectiveness. Thus, insuring for less than 80% of value is a clear indication of being underinsured.