What Does It Mean to Self-Insure?
The term self-insure can be confusing. Here’s a quick explainer: 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 related and 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 the costs that insurance normally would. You pay for everything completely on your own.
Putting it simply, this means 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 car accident, you are responsible for paying a lawyer and any settlement. 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 help protect you from going bankrupt from an illness, accident, or natural disaster. The insurance company will help you if you are sued as a result of someone being hurt on your property or an automobile accident.
It 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.
What Are the Benefits of Self-Insuring?
One of the main benefits of self-insurance is, of course, the cost benefits. You can save money on high insurance premiums by foregoing some insurance policies in favor of self-insuring. But keep in mind that you will have to set aside a good portion of money to pay for any additional issues.
Should I Self-Insure for Car Insurance?
It is against the law not to have car insurance, so you should not 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 in an accident.
Also, keep in mind that when you consider your car insurance policy you should make sure that the liability coverage is 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 include only choosing to go with comprehensive or liability insurance while avoiding collision insurance.
Should I Self-Insure for Health Insurance?
Additionally, medical bills quickly add up in a catastrophic event or as the result of a serious illness. For example, 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.
As well, avoiding disability insurance can be a way to self-insure. You can also extend the waiting period for when your disability insurance kicks in, effectively lowering premiums.
Should I Self-Insure for Home Insurance?
While you may be tempted to self-insure for homeowner’s insurance, when you compare the cost of a homeowner’s insurance policy compared to replacing your home or paying for a major repair, it is probably more financially prudent to buy insurance.
Your home is an asset – and an investment – and you should protect it properly. Many policies will also protect you in the event that someone was injured in your home and decided to sue you.
On the other hand, one may opt out of renter's insurance and choose to cover any potential loss from fire, theft or related incidents. As well, choosing not to insure valuables, like jewelry and collectibles, is a self-insure option.
Should I Self-Insure for Life Insurance?
You may also consider self-insuring for life insurance. However, you should only take this route when you are completely debt-free and have enough money saved or invested that the insurance policy would not make a difference in whether or not your family would be taken care of.
Until you reach that point, you should purchase a life insurance policy of about three to four times your annual income. Although, you may add a little bit more if you are heavily in debt. You may consider carrying life insurance even after you have reached this point if you want to pass on something to your children after you have passed away.
Insurance is designed to help protect your assets and your wealth. It helps to limit the financial impact of certain disasters or tragedies you may face. Although it can be frustrating to give money to the insurance companies every month, it is worth the peace of mind of knowing that the companies will be there when you need them.
Updated by Rachel Morgan Cautero.