Avoiding High Insurance Costs by Self-Insuring
To understand whether or not self-insurance is a good idea for you, it helps to understand first what insurance is all about. There are many tricks or tips you can use to save money on your insurance to help understand how to look at your personal situation to decide if self-insurance is a good idea for you or not.
The theory of buying insurance is to purchase protection for something that could cause a financial loss which 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 based on actual data of claims paid and charging premiums that allow them to pool together enough money from all the insurance policyholders premiums to always save more than they pay out in claims over time. You can learn more about this in Understanding an Insurance Premium and How It Works
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, well, without even realizing it you are self-insuring the stereo. Self-insurance is accepting full responsibility for your assets and in turn financial risks associated with potential losses, like being robbed.
Self-insurance can apply to any situation where you stand to lose something and did 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 is not relevant, 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?
A person should self-insure when they have enough money to cover a loss of income, loss of personal property, or can afford to pay the costs related to certain expenses all 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, then you should consider getting insurance. If you have the means to get the money on your own, then 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 fund
A self-insurance fund is basically 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 for will help you determine how much to set aside.
Examples of Ways You Can Use Self-Insurance
1. Eliminate your need for some types of insurance policies, or take reduced coverage options for situations in which 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 just pay for repairs on your own without the help of 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, with no collision coverage when the car value is small enough that you would be willing to make repairs or replace the car out of your own savings instead of having to count on an insurance company.
- Decide not to insure things on floaters and endorsements, like valuables and jewelry for example, which have limited coverage on home insurance policies, by using 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 just take the loss if it comes your way.
2. 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 immediately lower your premium payment. This article covers everything you need to know about using your deductible to save money on insurance
3. Lengthening your disability waiting period. Everyone needs disability insurance and if you can afford it you can use your self-insurance fund to permit you to accept a longer waiting period before your disability insurance kicks in which in turn will enable you to have reduced premiums.
4. Consider high deductible health insurance, or taking higher deductible options when choosing your policy. This article on saving money on health insurance helps walk you through all the ways you can save money on insurance: 10 Ways to Keep Your Health Care and Insurance Affordable
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 because it is often when we need insurance the most to protect us, that we also end up in a situation trying to cut costs to meet our needs. Self-Insurance is usually a better option when you have more money and can start taking on the risks of insurance yourself. Deciding to self-insure when you cant pay for losses is really 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 just cover it or take the loss yourself.