While purchasing insurance policies is the most traditional method of obtaining coverage, self-insurance is an alternative. Self-insurance is a way to save money and pay for losses, rather than having to pay insurance premiums. It is less common than other types of insurance but may still be an option in certain situations. In 2018, tens to thousands of employers self-insured employee health benefits.
A self-insurance plan is appealing but it has its own risks and benefits. Is it worth considering forgoing traditional insurance and instead setting aside money for the unexpected? We will help you make a decision by explaining self-insurance.
What is self-insurance?
You can choose to self-insure and save money instead of calling an insurance agency to buy a traditional policy.
Self-insuring has the primary benefit that you can be disaster-free and still get the insurance premiums you paid. However, the main drawback is that if you do experience an unexpected loss, you are responsible for financial recovery.
Self-insurance and the types of policies it can replace
You can use self-insurance to cover different types of insurance. Here are some policies that self-insurance can replace if you’re unsure about where self-insurance might work in your life.
Car insurance
Most states require drivers to have minimum liability coverage from an insurer. However, self-insurance may be possible for certain components of your auto insurance coverage.
If you’re concerned about monthly costs, you might choose to have your liability coverage through a inexpensive insurance company, and then self-insure for additional protections like collision and comprehensive. If your vehicle is damaged, you could put aside money. This would allow you to self-insure for any damages to your vehicle, even if you have traditional insurance for your liability coverage.
If you have a car loan or lease, this may not be an option. Your lender may require you to have full coverage . You may need to save money to replace or repair your car. In this case, you might want to compare what you would pay for traditional car insurance in your area.
Renters and homeowners insurance
Your lender will most likely require you to have homeowners insurance if you have a mortgage. If you are the owner of your home, you might be interested in setting up a self-insurance program.
If you have substantial savings, this option is best. You will need to be able to pay the costs of rebuilding your home and to replace any belongings damaged if your home is completely destroyed.
Renters may also consider self-insurance. You can choose to self-insure, rather than purchasing renters insurance. Renters who self-insure save money and avoid paying a premium every month, quarterly, or annually. These renters have the option to tap into their savings and replace their belongings, rather than filing an insurance claim. However, some landlords require tenants to have renters’ insurance.
A traditional insurance policy does not cover your personal property and home. You should consider the cost of someone causing damage to your property or getting hurt while you are self-insuring. These costs can include legal fees, medical bills, and the repair or replacement of damaged items. These situations are covered by a homeowners or renters policy with personal responsibility coverage. However, if you choose to self-insure, you would bear the full cost of these expenses.
Insurance to cover disasters such as floods or earthquakes
Flood and earthquake damage are usually not covered by homeowner’s insurance. You can choose to self-insure, rather than buying an endorsement or purchasing a separate policy that covers your home against such disasters.
It is important to assess the risk of flooding in your home. Flooding may not be an issue if your home is located in a flood zone that is significantly elevated. If your home is in a floodplain, however, flooding can cause damage up to $25,000 to your house. A flood insurance policy may be a better option if you don’t have the funds to repair your home. You may also need traditional insurance coverage if your home is mortgaged or you are located in an area at high risk for such disasters.
Life insurance
Life insurance provides financial protection for your loved ones in the event of your death. However, a traditional policy to cover life can be too expensive. Some people opt to self-insure their life insurance. They set aside money over their lives that they will leave to their loved ones.
You have many options when it comes time to purchase traditional or self-insured life insurance. It is important to save enough money to pay your funeral costs, to replace your income, to pay off your debts, or to leave a financial legacy.
Insurance for health
Many people decide to forego coverage because the landscape of health insurance is constantly changing. Some people set up self-insurance plans, while others hope to keep their health. Check with your state’s requirements before you decide to forgo purchasing a policy. Some states require coverage.
You can choose to self-insure if you don’t have a policy. To determine how much you should save, research the healthcare costs in your region. An average American spends approximately $11,000 each year on healthcare.
Self-insurance: Advantages and disadvantages
A self-insurance plan works best for people who have a large pool and are comfortable with minimal risk. Small businesses may set up a self-insurance group to provide their employees with health benefits. A family may decide to self-insure their second home, as they know it could be vacant while they save for repairs.
Self-insuring is like any other financial decision.
Self-insurance has many advantages
Self-insurance has many benefits.
- There are no policy limits: Self-insured individuals are not subject to the same limits as traditional insurance. You have the option to save as much or as little as you think is necessary to recover from a loss.
- Flexible fund usage: Self-insuring allows you to choose how your funds will be used following a loss. This gives you complete flexibility to recover the way that you want.
- Savings potential: Self-insurance is a great way to save money. You can save that money for another purpose or put it towards savings if you don’t have an premium.
Self-insurance can be a great option because it offers you more options for recovering from a loss, and also the chance to increase your savings. However, you need to consider the potential drawbacks.
Self-insurance has its disadvantages
There are some drawbacks to self-insurance, such as:
- Planning is difficult: A self-insurance program requires a plan. Self-insurers who are consistent in putting money into a self-insurance account and refusing to use the funds for any other purpose than covering losses that would be covered by an insurance policy are the most successful.
- Legal implications: Your state might have specific requirements regarding your car and health insurance. Additionally, your mortgage lender may require that you have certain levels of home insurance. You should ensure that you are still in compliance with all applicable requirements before you self-insure.
- Potential for high out-of-pocket costs: Self-insurance can save you money by not having to pay insurance premiums. However, auto, home, and health losses can quickly escalate, sometimes costing thousands of dollars or more. You will need to pay out of pocket for any damages if you don’t have an insurance policy. You could face financial ruin if you don’t have enough savings.
Like many financial decisions, self-insurance is multifaceted. It may be a wise decision for some people, but it is unlikely to work in all situations. Talking to a financial advisor can help you determine if self-insurance is right.
Questions frequently asked
What are the benefits of self-insuring?
Self-insuring is a method to avoid paying premiums. Self-insurance works best for those who have a lot of assets. There are many ways to save money if you don’t have the budget for self-insurance. If you are able to find a policy with a lower price, you can get quotes from multiple companies and switch providers.
Self-insurance is an option for all types of policies.
Not necessarily. Nearly all states require drivers to have at least the minimum level of auto liability insurance. You should confirm that self-insuring would still comply with any state requirements.
What is the cost of self-insurance?
Your specific situation will determine how much you need to save for self-insurance. For example, if you self-insure your home, you’ll likely need to save more money than if your car is insured. Homes are more expensive than cars. A financial advisor can help you figure out how much money you can save by self-insuring.
