What Does It Mean to Self-Insure?
Know the risks of going without insurance
The term "self-insure" can be confusing. When someone says that you can always self-insure, it does not necessarily mean going out and getting independent health insurance. Self-insuring means that you save up enough money to cover the possible expenses that may occur in the event that you suffer an unexpected loss, injury, or illness.
What Does It Mean to Self-Insure?
When you self-insure, you basically set aside extra funds to pay for any accidents or bills yourself. You do not have insurance to cover emergency needs. Instead, you plan to pay for everything out of your own pocket.
Putting it simply, this means that if your home burns down, you will have to pay to rebuild it. If you are in a car accident, you pay for the repairs and any medical bills. If you are sued as a result of the accident, you are responsible for any legal fees or settlement costs. If you are diagnosed with a serious illness, you pay for all treatment on your own.
What Are the Risks of Choosing to Self-Insure?
An insurance policy is there to protect your finances. It will guard you from going bankrupt from an illness, accident, or natural disaster. The insurance company will assist you if you are sued as a result of someone being hurt on your property or in an automobile accident. Insurance is the best defense against a tragedy affecting your finances for years to come.
It is vital to have most types of insurance (health, home, car, and life) in most stages of your life; in some cases, it's illegal to go without insurance.
What Are the Benefits of Self-Insuring?
The primary benefit of self-insurance is, of course, the cost savings. You can save money on high insurance premiums by foregoing some insurance policies in favor of self-insuring. This can lead to major savings over a long period of time. But keep in mind that you will have to set aside a good portion of the money to pay for any additional issues, and the costs of a disaster can far outweigh what you save on insurance premiums.
Should I Self-Insure for Car Insurance?
In every state except New Hampshire and Virginia, it is against the law not to have car insurance with at least minimum liability coverage. So, in most cases, you cannot completely self-insure for car insurance. Additionally, car insurance protects your assets if you were in an accident, and will cover you if you are sued after an accident. Ideally, your car insurance policy should be high enough that the person would not sue you and come after your home or savings.
However, you may opt to avoid full coverage, especially if the automobile has little value. This may mean choosing only liability insurance while foregoing collision or comprehensive coverage. Your agent will know the state laws and the best options for your situation.
Should I Self-Insure for Health Insurance?
As of the 2019 tax year, the federal government no longer levies a penalty if you don't have health insurance. However, a few states—California, the District of Columbia, Massachusetts, New Jersey, Rhode Island, and Vermont—still have an individual mandate and most charge a penalty if you go uninsured.
Beyond the legal issue, there's the serious threat to your finances. Medical bills quickly add up in a catastrophic event or as the result of a serious illness. It is not uncommon for health insurance costs to rise above $1 million if you are diagnosed with a serious illness like cancer. If you did not have health insurance, then you would not be able to pay for the treatment.
A better option would be to purchase a high-deductible health insurance policy, which offers lower monthly premiums, but a higher deductible. In that case, you're covered in the event of a disaster while still minimizing your monthly costs.
Avoiding disability insurance can be a way to self-insure in this area, though, if you have enough money to endure some time out of work. You can also extend the waiting period for when your disability insurance kicks in, effectively lowering premiums.
Should I Self-Insure for Home Insurance?
It's not legally required that you have a homeowners insurance policy. However, unless you own your home outright, your mortgage lender will most likely require that you keep your property insured at all times.
If you don't have a lien against your property, you don't technically have to have insurance. But, while you may be tempted to self-insure for homeowners insurance, consider the cost of a homeowners insurance policy compared to that of replacing your home or paying for a major repair. An average premium in the U.S. is around $1,200 per year. When you weigh that against paying to replace your $200,000 home, it is probably more financially prudent to buy insurance.
Your home is an asset—and investment—and you should protect it properly.
Many policies will also protect you if someone is injured in your home and decides to sue you. On the other hand, if you're a renter and your lease allows it, you may opt-out of renters insurance and choose to cover any potential loss from fire, theft, or related incidents. Choosing not to insure valuables, such as jewelry and collectibles, is a self-insure option as well.
Should I Self-Insure for Life Insurance?
You may also consider self-insuring for life insurance. However, you should only take this route if you have no dependents or you are completely debt-free and have enough money saved or invested for your family to be taken care of without the death benefit from an insurance policy. Remember, if your family is suddenly left without your income, they will have to cover normal expenses plus the costs of things such as a mortgage, childcare, and education. Life insurance helps with this burden.
Until you reach that point, you should purchase a life insurance policy that will cover the needs of your dependents. Your agent can help you decide how much you need, based on your financial situation. They can also help you decide whether a term policy or whole life policy is right for you. Term policies last for a set period and don't hold any value unless you die, while whole life insurance is permanent and builds investment value over time.
The Bottom Line
Insurance is designed to protect your assets and wealth. It helps to limit the financial impact of certain disasters or tragedies you may face. In many cases, it is legally required. Although it can be frustrating to give money to the insurance companies every month, it is usually worth the peace of mind of knowing that the companies will be there when you need them.
Updated by Rachel Morgan Cautero.
Insurance Information Institute. "Automobile Financial Responsibility Laws By State." Accessed March 5, 2020.
Insurance Information Institute. "What Is Covered by a Basic Auto Insurance Policy?" Accessed March 5, 2020.
EHealth. "Does Your State Require You to Have Health Insurance?" Accessed March 5, 2020.
Insurance Information Institute. "Can I Own a Home Without Homeowners Insurance?" Accessed March 5, 2020.
Insurance Information Institute. "Facts + Statistics: Homeowners and Renters Insurance." Accessed March 5, 2020.