Under insurance is when the insured value of assets is significantly lower than the asset's actual value. It can go either way; it can be a good or terrible plan. How does this work? Let us explain.

Say your home contents are worth AED 50,000, but you value them at AED 30,000 when you file for Home Contents Cover insurance. It is under insurance. Many people are underinsured for many reasons. It helps lower insurance premium costs. You can be in a transitional phase and only need insurance for that period. Another reason you choose to be underinsured is when you think you live in a low-risk area. Therefore, you don't have to pay too much in insurance because the risk of being robbed or the apartment catching fire is minimal.

However, this strategy can backfire when you are underinsured; you risk losing out a lot. No matter how secure your area of residence is, it is not unlikely to face some damage to your personal belongings or home contents. Buildings go through structural damage and regular wear and tear. So when it comes time to claim, and you're insured, it can be counterproductive. During the claims process, the insurance provider will find out that your property was undervalued and will only pay a reduced portion of your claim. So, to save a few hundred every month, you can lose out on a big claim when you need it.