From Military Officer Magazine: How to Choose Insurance Policies

(This article originally appeared in the July 2025 issue of Military Officer, a magazine available to all MOAA Premium and Life members, who can log in to access our digital version and archive. Basic members can save on a membership upgrade and access the magazine.)

When it comes to most areas of personal finance, we succumb to inertia by simply setting up a plan and leaving the intricacies alone. While this might make sense for contributions to your retirement account, it can be downright risky to leave insurance coverage unmonitored for years.

"People set limits on policies and then don't think about it again," said John Piper, a product management director at USAA who has worked in the insurance industry for more than 25 years. Instead, he recommends setting an annual reminder to check whether you have adequate coverage.

According to the Insurance Information Institute, standard homeowner's policies insure your home and your belongings. The policy is generally configured as a package that not only covers damage to your home's physical structure, other structures on your property, and your personal belongings but also includes a layer of liability protection.

Homeowner's insurance also provides coverage of additional living expenses, which pays for temporary housing and expenses if a covered event leaves your home uninhabitable.

While homeowner's insurance covers many types of disaster-related damage, there are certain exceptions, like floods and earthquakes, that are excluded and might require separate policies.

In addition, you might need to purchase a separate policy or endorsement — sometimes called a rider or add-on — to your standard homeowner's insurance. This is common if you have priceless antiques or other valuables, own what the industry considers an aggressive dog breed, or live near an abandoned mine or sinkhole.

So how do you determine whether you have chosen the correct amount of homeowner's and auto insurance coverage? Here are some guidelines.

Homeowner's Insurance

Assess how much it would cost to rebuild your home. Consider the size and age of your home. Have material costs gone up? Have building codes changed? An appraisal could help, but that might be expensive. Most insurance agents can help you assess replacement costs.

Take stock of your belongings. Inventory everything you own. Take pictures to create a record of your belongings in case you need to make a claim.

Home insurance policies provide compensation as either the actual cash value of an item or the replacement cost. The former means depreciation is factored in, whereas the latter is based on today's value of the item.

Research local rental rates. If you live in an expensive area and your home sustains major damage, you might have to live in temporary housing for an extended period of time. Your policy might not include enough coverage, so you might need to purchase additional living expenses coverage.

Personal finances and risk tolerance play a part. How much risk are you willing to accept? How much can you afford to cover out of pocket to rebuild your home or replace personal items? You might be able to lower your rates by increasing your policy's deductible — the amount of money you agree to pay before your insurance coverage kicks in. But if disaster strikes, you'll be on the hook for that amount before you can make any claims.

What About Flood Insurance?

A standard homeowner's insurance policy doesn't cover flood events, which might include water intrusion due to heavy rain, melting snow, an overwhelmed community drainage system, and rising tides.

To have coverage for these types of events, homeowners must purchase a separate flood policy. But according to the Insurance Information Institute, only about 4% of homeowners nationwide have flood insurance, even though 90% of disasters in the U.S. involve flooding.

"One thing we all learned in 2024 is that you don't have to live on the coast to need flood insurance. Many homeowners assume that if their mortgage company doesn't require flood insurance, then they don't need

to carry it; that couldn't be further from the truth," said Pam Bergeson, a certified financial planner and the founder and principal advisor at Tailwind Financial Planning.

Indeed, the Federal Emergency Management Agency noted on its website that even if someone lives in an area that isn't prone to flooding, "it's advisable to have flood insurance. Anyone can be financially vulnerable to floods."

The agency also found that between 2003 and 2023, 99% of counties in the U.S. experienced a flood event.

Auto Insurance

Know your state's rules. You'll need to carry at least your state's required minimum coverage, but that might not be enough. According to the Insurance Information Institute, the average bodily injury liability claim in 2023 was $26,501, which is higher than the minimum required in most states.

Liability covers the other party. Liability coverage is the main component of car insurance, but that doesn't cover your own expenses if you cause an accident. Rather, it pays for other people's injuries, deaths, and property damage. Property damage liability insurance pays to repair or replace property you damaged.

"Property damage is another area where there is typically a disconnect. Unlike bodily injury liability insurance, it is often very inexpensive to add a reasonable amount of coverage to a policy," said Joseph Montanaro, certified financial planner and relationship director at USAA's military advocacy unit.

Collision coverage pays for damage to your own car if you cause an accident. Comprehensive coverage pays for damage to your car from noncollision situations like vandalism, theft, hail, or accidentally hitting an animal. Both types of coverage are optional unless you lease or finance a car. But if you have an older car, consider opting out of these to save on premiums.

However, if you suffer damage to your own car due to either a natural disaster or a collision for which you were responsible, you'll pay out of pocket for the entire repair or replacement.

You could also consider raising the deductible to reduce premiums, but then you need to factor that amount into your finances.

Coverage amounts depend on your net worth. Consider how much you stand to lose in a lawsuit if you don't have a high enough limit to cover all the injuries and damage you might cause. In some states, someone can come after you for future earnings. In other states, some assets — like employer-sponsored retirement plans — might have special protection by law. You'll also need to decide how much you can afford to pay to repair or replace your ride.

Umbrella Coverage

Umbrella insurance is extra liability insurance beyond what you carry on your homeowner's/renter's or auto insurance policy. It sits (like an umbrella) on top of your existing insurance coverage and comes into play if you reach the limit on an underlying policy. It typically covers you and members of your household.

For example, if a dependent runs a red light and hits another car, and the individual in the other car has $500,000 in medical bills, then even if you have $300,000 of bodily injury coverage, you'd be on the hook for the excess $200,000.

This is where umbrella coverage comes into play, and it can even cover legal costs.

Piper said savings, income, current and future asset levels, personal risk tolerance, and state regulations/environment should all factor into whether you should get umbrella insurance. Montanaro added that if your underlying policy coverage is insufficient, you might be required to boost coverages to qualify for an umbrella policy.

Situations where it might make sense to have umbrella coverage include owning a pool, trampoline, or dog; being involved in kids' sports; regularly posting reviews of businesses; owning multiple homes; and serving on the board of a nonprofit organization. However, most claims stem from driving and causing bodily injury to others. Anyone who has significant assets or savings should also consider this type of coverage.

Umbrella insurance typically costs just a few hundred dollars for $1 million in coverage. But keep in mind, it doesn't cover your own injuries or property damage, so you'll need other types of coverage for that, such as health insurance.

"You really should check all your policies every year," Piper said. "Insurance is not a sexy thing — no one wants to think about it. They say, 'I'm careful, it won't happen to me,' but things happen."

He added that talking to a financial advisor is crucial and can help you adjust your underlying insurance policies to get proper asset protection.