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Self-insuring means saving enough money as a rainy day fund and optimizing your financial and general well-being.
Insurance premiums can quickly add up: healthcare, car, house, disability and life, just to name a few. And if you never claim, it can easily feel like you are pouring money down the drain. There is another option – self-insuring. But you want to be careful.
When you self-insure, you set aside extra money to pay out of your pocket for any losses or damages, if and when they occur instead of paying a premium to an insurance company to cover your losses when they occur.
The basic idea behind this is that you will save money by avoiding making regular premium payments so that you have money to pay for damages if a loss occurs — which may or may not ever happen.
Risk is a fact of life. We can make active decisions on how we want to handle risk, and in doing so, we have several options at our disposal.
The first option is avoidance; this is when you eliminate the source of the risk. For example, if you don’t own a car, you cannot have your car stolen. The second option is loss control, where the point is not to eliminate the risk, but to reduce/control it by, for example, wearing a seatbelt while driving. The third option is the contractual risk transfer to others. For example, when you rent a car, the company transfers the risk of car damage to you. The fourth option is insurance, where you transfer the costs of losses to an insurance company.
And the final option is risk retention, where you keep the risk and pay part or all of the losses when they occur. This is self-insurance. Self-insurance is the process of establishing a fund that you will use to cover the costs of a loss. It does not eliminate or control risks; it provides a means of covering losses that you will have only if the damaging event occurs.
Self-insurance will work better in some situations than others, while in some cases, it won’t work at all.
Self-insurance is a useful approach in the case of smaller and predictable losses. In other words, the lower the potential loss or, the more predictable it is, the more it makes sense to self-insure. For example, you might choose to self-insure against a car accident with a $500 deductible on auto insurance collision coverage, but carry $100,000 of liability coverage to protect you in case of a lawsuit resulting from a bigger accident.
However, it is important to keep in mind that you can’t look at the potential loss in isolation – you need to look at it from your own financial perspective. This is why you need to assess the size of potential loss against the money you have stashed away for covering unexpected expenses, which we usually call an emergency fund.
The standard advice is to keep an emergency fund equal to at least three months’ worth of your expenses. But the reality is that many people live paycheck to paycheck, which means they don’t have that money available. If you don’t have funds to cover unexpected losses out of your own pocket, it doesn’t make sense to self-insure.
You can self-insure by dropping certain insurance altogether or by being very intentional when choosing an insurance policy.
In the first case, you are left without any coverage for a particular risk, which means that you will be responsible for the full amount of losses. This approach may not work well with certain policies. For example, some policies may be required by the law. Also, self-insuring for events that may result in extremely high expenses, such as critical illness (heart attack, stroke, organ transplants, etc) may not really make financial sense.
The second option is to tweak your insurance policy to optimize for protection and price. You can do this by choosing:
Keep in mind that self-insuring doesn’t mean that you go uninsured. Instead, it means that you assume responsibility for financial losses that you may incur, rather than shifting these risks to an insurance company.
It also doesn’t mean that you just randomly drop whatever insurance policy, rather that you are being very intentional about selecting a coverage you really need.
Self insurance offers numerous benefits, when done correctly. One obvious benefit is reduced costs by avoiding higher premiums. Money saved can then be invested allowing increased savings.
Self-insurance also promotes good habits. People tend to make better choices when they know they will bear consequences of the decisions they made. Self insurance also gives you a sense of control over finances due to the active steps taken to optimize your financial and general well-being.
Life is full of risks. To your family. Your assets. Your future. The problem is traditional solutions propose traditional answers. Let’s make sure you’re protected.
Life is full of risks. To your family. Your assets. Your future. The problem is traditional solutions that propose traditional answers, one policy at a time.
Vero’s fast and free Protection Plan is an unbiased analysis of all your risks. We’ll recommend what insurance to buy — and which policies you can safely cancel to save money.
Insurance is essential, yet the premiums add up quickly and it takes knowledge and analysis to truly lower the costs. Learn more.