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Is It a Good Idea to Self-Insure?
Yes
Theory behind insurance—car, home, renters, health, life, etc.—is to purchase protection, with monthly premium payments, for an event that could cause a severe financial loss you would not be able to pay for on your own. However, if you end up never needing the coverage, it can feel like you wasted all of that money in monthly premiums. One solution to save money and still have protection against loss is to become self-insured.
How self-insurance works
Whenever you don’t have an insurance policy covering a risk (that your house will flood, that someone will burgle your apartment, etc.), you are self-insured because you are accepting full financial responsibility for replacing and/or repairing your assets. The difference between being self-insured and being uninsured is having enough savings, investments, or assets to cover a loss.
Self-insurance requires a large savings account or other liquid assets that can be used to pay for a loss. In general, the more predictable and smaller the loss, the more likely a person will choose to self-insure because it’s easier to pay for. For example, a renter might prefer to self-insure rather than purchase renter's insurance to protect their assets in the rental.
Self-insurance is, in general, risky in the short-term before you’ve saved up enough money to cover any loss or expenses. Someone might choose to continue traditional insurance coverage until they’ve saved or invested enough money. Even once you have sufficient assets saved or invested, it’s possible you could deplete those financial resources if you need to pay for multiple losses or damages in a row.
The benefits of self-insuring include being able to invest the money saved on monthly premiums and being able to raise the deductibles on the insurance you can’t avoid paying—which of course means your premiums on those plans will be lower.
Who should self-insure
Self-insurance isn’t a good idea when you don’t have enough money to cover the financial impact of a loss of income, loss of life, or loss of personal property. Sit down and calculate the financial impact of forgoing traditional insurance and the scenarios it would cover. Do you have the financial capability to provide for yourself and your family, repair the damage, or replace the loss?
If you’re considering self-insuring because you struggle to pay traditional insurance premiums, a word of caution: saving a few dollars each month isn’t worth jeopardizing your financial security. The bottom line is when you decide to self-insure, you need to be willing to risk paying for it all or accepting the loss.
Types of insurance you should not self-insure
- Car Insurance — Car insurance coverage is mandatory in 48 states, so you’d be breaking the law if you forwent car insurance altogether in those states. Car insurance can protect you against loss of your car, loss of money for medical expenses resulting from an accident, money owed to other parties involved in an accident with you, and money spent on legal costs if you’re sued.
- Homeowners Insurance — This is necessary primarily because the costs to repair or rebuild your home after a natural disaster could be astronomical and beyond a reasonable amount for you to save up. Many home insurance policies also provide legal liability protection in case someone has an accident in your home and sues you.
- Health Insurance — The Affordable Care Act made it a requirement to have a level of minimum coverage. Ongoing medical bills are also a scenario that could quickly burn through savings, investments, and other assets.
Ways you can use self-insurance
Even with the coverage listed above, you can opt to self-insure for other types of insurance coverage. Or you can choose reduced coverage options or higher deductibles across all insurance plans. Consider the following options:
- Don’t pay for extended warranties on appliances or home warranties if your emergency fund can pay for repairs.
- Don’t carry full auto coverage on a car of little value that you would be willing to replace or repair from your savings.
- Opt out of floaters and endorsements on other policies if you can pay to replace or repair items.
- Lengthen your disability waiting period to reduce premiums.
- Choose high deductible health insurance or take higher deductible options when choosing your policy.
- Self-insure your life insurance when you can afford it, i.e. you’re debt free, your term life insurance has run out, and/or your children are grown and are no longer dependent on you.
Becoming self-insured can be the right move for you if you have enough savings and assets to pay for expensive repairs, replacement costs, or bills due to an accident or other unfortunate event.