More Lessons Learned on Insurance (part 2 of 2)

Last week’s post covered the basic insurance issues when you’re just starting out. You’ll insure your personal property and your vehicle for the financial catastrophes that you can’t cover on your own, and you’ll control the costs by using high deductibles. Insurance expenses make it even riskier to own a home while you’re on active duty, so try to rent until you’re confident that you’ll be in one place for at least five years. And finally, spouses should insure each other to gain the security of knowing that they’ll have financial support to get through the trauma.

Our next couple of tours were in Hawaii, and we learned a lot more about insurance. In 1992 we started a family, and once again life got complicated. This time we maxed out our SGLI policies and added an uninsured/underinsured motorist rider to our auto policies. The idea was that if our daughter was disabled by a car accident and needed lifetime care, we’d have enough of an insurance settlement to fund a special-needs trust. We’re continuing the UM/UIM until our daughter starts her active duty and gets all of her own insurance.

Our daughter’s medical insurance is still covered by my Tricare while she’s in college, of course, but dental insurance was a different decision. We bought her dental insurance while we were on active duty because the premiums were very low, but when we retired they became much more expensive. It turned out to be cheaper to go uninsured and to pay out-of-pocket for all of our dental care.

My spouse and I are blessed with good genes (and a lot of dental floss) so we only visit the dentist every 2-3 years. (A decade later, so far so good.) Our daughter’s pediatric dentist immediately gave us a 20% discount for cash at her semi-annual visits. Very little orthodontia is covered by dental insurance, and again we negotiated a significant cash discount.

From what I’ve read over the last decade, the quality & materials of dental treatment have improved while the cost seems to have dropped. Even if spouse or I developed a sudden vulnerability to root canals & crowns, we’d probably still self-insure.

In 1994 the Navy transferred us back to the Mainland. By this time we knew that we were going to come back to Hawaii someday, so we chose to rent out our property. (The real estate market sucked, too– bad time to sell. Never saw that coming!) We chose to insure our rental for “named perils” (also known as Basic Form HO-1) instead of “all risks”. This is a cheaper version of a property policy that does not cover damage from snow/sleet/ice, electrical surges/short circuits, or problems caused by plumbing, heating, air conditioning, or appliances.

We kept our hurricane insurance (with a very high deductible) and added more liability insurance. At this point, we felt that we had enough assets to self-insure for smaller repairs, and we knew that “smaller” claims (under $5000) were more likely to raise our premiums or even cause our insurer to decline a renewal.

Hawaii also taught us about “adjusted rebuilding costs”. This rider attempts to cover the higher cost of materials after a natural disaster (greater demand for lumber and windows!) and the local requirements to rebuild to a higher code standard. We review this every few years against our property appraisals and tax assessments. Again, we had no clue about this coverage when we owned our first two homes, and we would have been tempted to skip the added expense. It would have hammered us just as hard as a hurricane or an earthquake.

We eventually returned to our Hawaii home and lived in it for a few more years, but in 2000 we discovered a bigger property in a better school system. Best of all, it was filthy and in horrible material condition! We immediately bought it (at a huge discount) and moved our daughter to the new school system.

We also started pouring in the sweat equity while we once again rented out our other home. As Hawaii property values resumed their upward march, we boosted our umbrella liability policy (again with Armed Forces).

Our properties were both heavily mortgaged, but we wanted to make sure that we had enough liability coverage to cover the value of our assets (gross worth) and not just our net worth. We spent hours on the phone with USAA and Armed Forces Insurance to make sure we had all the right levels of home/auto coverage under the umbrella liability policy. Today one of my most hated chores is comparing the various limits and features between the two companies to make sure that we’re getting the best insurance and prices.

One of the reasons we bought the new home is that we were approaching retirement and knew that we’d spend many more years in Hawaii. Landlording is much easier when the rental property is only five miles away (instead of five time zones) and we’ve spent much of the last decade on home improvement projects. Each year we’ve reviewed our coverage (for example, adding our photovoltaic array) and asked for discounts (retirees are home more often than working families). In general, we carry the highest deductible offered and self-insure for as much as a $25K loss.

We still don’t carry flood insurance. Both properties sit on a rise with huge natural drainage (not just the storm drains) and landscaping to divert the storm surge. We have a concrete slab, no basements. We’ve spent extra money on leak-stop water connections to toilets, the dishwasher, and the washing machine. The washing machines are in the garage, in a catch basin, and drain away from the house. (Unfortunately we had an opportunity to test that in each house.) We can let sewage back up in the garage and drain to the street. We have tile floors and wall-to-wall carpets. We can handle our own drywall & carpet replacement if necessary. We’re miles away from (and hundreds of feet above) the tsunami inundation zones. I still worry about flooding, and we can still make a few improvements, but I’m happier than if I was paying for flood insurance. If our homes had basements or freezing weather then we’d probably clench our jaws and buy flood insurance.

We don’t carry earthquake insurance either, and in 2006 we almost regretted it. However, it turns out that our hurricane strapping kept things together through a frightening 6.6 temblor with only minor drywall cracks. Earthquake insurance is still prohibitively expensive and we’re still self-insured, but we’re more confident that we can recover from the damage.

When I retired from active duty, spouse made a decision that dramatically changed our quality of life: she declined Survivor Benefit Plan coverage. Neither one of us wanted to pay 6.5% premiums for 30 years. More importantly, we didn’t need the coverage. She was already close to her own pension, we have income from rental property, and we have enough assets to cover the mortgages plus either survivor’s living expenses. Our only child was 10 years old so childcare was a much cheaper prospect. We decided that we could buy cheap term insurance (we’re in good health) to cover the gap between military retirement and age 62 (Social Security), but that hasn’t been necessary.

At first, it was tight for a few years due to the mortgage payments, but serial refinancings have freed up room in the budget. When spouse retired from the Reserves, I didn’t even sign up for the Reserve Component SBP. Our spreadsheets show that we’d still have enough income from our own pensions and we don’t need to insure each other’s pensions. As commenter Spokane Al and other military retirees have decided, SBP is not always the best insurance for their situation.

More importantly to us, today that extra 6.5% works out to over $200/month in our budget. By the time spouse retired from the Reserves, we knew that our retirement budget was flexible enough and that we had enough income streams & assets to make it for the rest of our lives. I’m also tremendously relieved to know that I’m worth more alive (with my pension) than dead.

A few years ago we made a somewhat controversial decision that still has Armed Forces Insurance wringing their hands with anxiety: we canceled our personal property policy. Although all of our personal property has sentimental value and decent quality, our most expensive item on the list was spouse’s wedding ring. We don’t own much jewelry or military equipment and the vast majority of our possessions have very little actual cash value. Our furniture is easily replaced from Craigslist at a fraction of the retail price, and we have time to patiently shop for the bargains. When we realized that we could refurnish the entire house (and all of the closets) for less than $30K, we canceled the coverage.

One remaining insurance decision is long-term care. We still don’t have any, and we won’t make the decision until we’re in our 60s. Unfortunately, I’ve learned a tremendous amount on the subject due to my father’s Alzheimer’s and my appointment as his conservator. In 1992, he purchased an incredible inflation-protected policy that today is paying back over 25:1, and John Hancock’s losses will just get worse as their clients get older.

With what I know about my genetic heritage, it probably makes sense to buy a high-deductible Federal Long-Term Care Insurance Program policy with a long exclusion period. However, today’s policies seem unaffordable to both the clients and the insurance companies, so I hope the situation gets better over the next decade. My spouse and I have saved enough in SBP premiums over the years to be able to pay for long-term care insurance, and our pensions could even make us able to afford to self-insure.

I hope I can avoid the expenses for as long as possible. Long-term care insurance has scared me straight, and this time it might be permanent: I’ve cleaned up my act on diet, exercise, and even alcohol– and this time I really mean it.

What insurance lessons did we learn?

1. When you start a family, carry extra vehicle insurance for uninsured/underinsured motorists. If your kids are severely injured or disabled, you’ll have more financial support.

2. Understand the different types of homeowner insurance (HO-1, -2, -3) and when to use them.

3. Insure your home for higher rebuilding costs and more expensive structural codes.

4. As you accumulate more assets, insure your gross worth with an umbrella liability policy.

5. Carefully consider flooding and earthquake insurance. If you choose to go without then have a plan to mitigate the risks and save the assets to self-insure for major damage.

6. If you’re a military retiree, carefully consider your Survivor Benefits Program.

7. When you retire then reassess your insurance on your home, vehicles, and personal property. You may be eligible for discounts and you may even decide to reduce or eliminate coverage.

8. Delay your decision on long-term care insurance until at least age 60. Expenses are still rising rapidly while insurers are losing money and leaving the business. Consider high deductibles and long exclusion periods.

I hope our experience & mistakes help you make better decisions for your insurance situation!

What have you learned about insurance?  What advice do you have for us?

Related articles:
Pricing insurance and investments
Tricare, vehicle insurance, and uninsured/underinsured motorists
PT Money: My uninsured trip to the dentist
Real estate: rent or buy?
So you want to be a landlord.
Military insurance: SGLI, VGLI, SBP, and other benefits
USAA:  Seven Life Insurance Myths That Can Cost You

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

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