Avoiding High Insurance Costs by Self-Insuring

Woman set to fill out a health insurance form while an insurance agent explains her options while a laptop is open in front of him
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When understanding whether or not self-insurance is a good idea for you, it helps first to understand what insurance is all about. There are many tricks or tips you can use to save money on your insurance premiums to help you understand how to look at your situation to decide if self-insurance is a good idea for you.

How Does Insurance Work?

The theory of buying insurance is to purchase protection for something that could cause a financial loss that you would not be able to handle on your own. Insurance companies specialize in making money by having actuaries and underwriters assess the risks of financial loss. They base these losses on the actual data of claims paid and charge premiums that allow them to pool together enough money—from all policyholders' premiums—to save more than they pay out in claims over time.

What is Self-Insurance?

Everyone is self-insured to some extent. Anytime you do not have an insurance policy covering a risk, you are self-insured. For example, if you are a renter, do not have renters insurance, and you go shopping and buy a stereo, without realizing it, you are self-insuring the stereo. Self-insurance is accepting full responsibility for the protection of your assets and, in turn, the financial risks associated with potential losses, like being robbed.

Self-insurance applies to any situation where you stand to lose something and do not have insurance for it.

For example, people who do not have life-insurance are self-insuring their lives. Whether they have financial resources to cover the lost income for their family if they die or not, if they do not have insurance covering them, then they are self-insured. Not having enough money to cover the financial impact of a loss is an example of when self-insurance is not a good idea.

When Should a Person Self-Insure?

People should self-insure when they have enough money to cover a loss of income, loss of personal property, or afford to pay the costs related to certain expenses on their own by using their savings or other cash available.

To understand if you can self-insure something, you need to ask yourself what the financial impact will be on your life if you lose something. Do you have the means to comfortably take care of the situation, your property, yourself, or your family?

You need to know where you will get the money for a loss, and if you have no means to do so on your own, you should consider getting insurance. If you have the means to get the money on your own, you can consider self-insurance and decide if you are okay with paying for whatever it is you have decided not to insure.

Self-Insurance: Where Do You Get The Money to Self-Insure?

Self-insuring is a way to reduce your insurance costs by not paying someone else like an insurance company to cover your back if something goes wrong. You can do this by:

  • Having enough money to cover your losses in savings and assets
  • Deciding to build up a self-insurance reserve or an emergency fund

A self-insurance fund is a stash of cash set aside for you to use for your insurance needs. You will need to determine how much of an insurance reserve fund you will need for your particular insurance needs. By knowing what you will use your self-insurance fund will help you determine how much to set aside.

Examples of Ways You Can Use Self-Insurance

Eliminate Your Need for Some Types of Insurance Policies

When you take reduced coverage options for situations, you can assume the risk yourself. For example, you may be able to:

  • Eliminate purchasing extended warranties on appliances or home warranties if you can pay for repairs on your own without insurance
  • Waive full coverage automobile insurance for a car that is of little value by taking minimum car insurance—or take liability and comprehensive only coverage with no collision coverage. You can do this when the car's value is small enough for you to make repairs or replace it out of your savings instead of having to count on an insurance company.
  • Decide not to insure things on floaters and endorsements—like valuables and jewelry—which have limited coverage on home insurance policies. You can use your self-insurance fund to pay for the cost of replacing these items yourself.

These examples are only useful if you have the money to cover your losses yourself, or are willing to take the loss if it comes your way.

Make Your Auto and Home Deductibles Larger

By making your auto and home insurance deductibles larger, you will be "insuring yourself" (through your self-insurance) for the amount up to the deductible, which will enable you to lower your premium payment immediately. This article covers everything you need to know about using your deductible to save money on insurance

Lengthening Your Disability Waiting Period

Everyone needs disability insurance, and if you can afford it, you can use your self-insurance fund to reduce the coverage cost. The fund can allow you to accept a longer waiting period before your disability insurance kicks in which will enable you to have reduced premiums.

Consider High Deductible Health Insurance

By selecting higher deductible options when choosing your policy, you will save money spent on your health insurance.

Self-Insurance vs. No Insurance (Being Uninsured)

If you are struggling to pay for insurance and look at self-insurance as a possible solution, please be careful. Often, when we need insurance to protect us the most, we also end up trying to cut costs.

Self-Insurance is usually a better option when you have more money and can start taking the risk yourself. Deciding to self-insure when you cant pay for losses is just being uninsured. The bottom line is that when you decide to self-insure, you need to be willing to risk losing financial support in a loss and cover it all or take the loss yourself.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.