What does 'under-insured' refer to in an insurance context?

In the context of insurance, 'under-insured' refers to a situation where a policyholder does not possess sufficient coverage to fully compensate for a potential loss. This is particularly critical in property insurance, where the insured value of a property may fall short of its actual replacement cost. For instance, if a homeowner has insurance that only covers $200,000 but the replacement cost of their home after a disaster is $300,000, they are considered under-insured. This means that in the event of a total loss, the insurance payout would not be adequate to cover the entire cost of rebuilding or repairing the property, leaving the homeowner to bear the financial shortfall.

The other options address different insurance scenarios. For example, having more insurance than necessary relates to over-insurance, which is not relevant here. Policies with differing terms indicate potential complications in coverage but do not specifically indicate a lack of sufficient coverage. Lastly, being insured for a rise in value pertains to adjusting policy limits based on an increase in an asset's worth, which also does not capture the essence of being under-insured.