Self Insurance
October 20, 2011 
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Think of any event that could happen unexpectedly that would cost you money. Your house could burn down, you could get sued, you could be involved in car crash, you could get sick and need medical care. You can buy insurance to protect yourself from these and many more eventualities. We usually think of insurance as something to cover us in case something huge happens. But there are also insurance policies to cover your loss related to more minor incidents. For example, when you buy that new stereo system for your car, and the sales clerk asks if you’d like to purchase the extended warranty, that’s an insurance policy.
It’s a very good idea to have a contingency plan in case something goes wrong. There is a way to do it that can potentially save you a lot of money. Self insurance is just what it sounds like: you are insuring yourself. This means that if something goes wrong and you suffer a financial loss, you pay for it yourself. Isn’t that just like being uninsured? Yes, except that it implies that you have a plan to pay for these types of expenses. Here’s how you do it.
First, make a list of everything that you could buy insurance for. There are three categories to look at. First, write down everything you have that you could lose: a car, a house, a vacation in the Bahamas, future income, an iPod, etc. Second, write down things that you could suddenly need that would cost you money: medical care, legal services, etc. Lastly, look at potential liabilities. What financial loss could you possibly be deemed responsible for? You could cause damage to someone’s property or be responsible for an injury or even death. This could happen because you made a mistake while driving, or because you were negligent, or simply because you own the property someone was injured on.
Next, take a look at your list and put a dollar amount for the worst case scenario next to each thing. Some will be so high that you can’t estimate accurately. For those, just write $ $ $ .
For any insurance you could name, it’s safe to assume that the premium cost, over time, is a little more than the average claims over that time. For example, pet insurance costs a certain amount each month over the life of your pet. The insurance company is collecting premiums from each pet owner. Out of those funds, they will pay any claims the customers have and they’ll have some left over for their overhead. It would make sense to skip the policy and pay for any claims yourself, except for two things. You might be a person who has a greater than average claim, and you might have a claim before you saved up the money to cover the expense.
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How do you deal with those challenges? Start small. Find the lowest item on your list and start with that. What about that car stereo? If you could afford to replace it in the event that it breaks, skip the warranty and set the money aside instead. Get a separate bank account for all of your insurance funds and put the money there. One of two things is going to happen. The most likely scenario is that your stereo will not break and it will last a reasonable time. Hurray! Now you have some money in your insurance account. This will serve as seed money for the next time. The other possibility is that your stereo will break and you will replace it using the money you set aside plus some out of your own pocket. Then you’ll have to start over.
When you can, move to the next item. Maybe you can afford to drop the collision and comprehensive insurance on your older car. Take the money you save and put it into that insurance account.
Every time you deposit more money in your insurance account than you need for claims, your account grows. This helps with the problem of having an unexpected expense that you haven’t saved up for yet.
There are some types of insurance that you’ll never replace with self insurance unless you’re super wealthy. These are the risks that you can’t afford if the worst case scenario should occur. Medical insurance is a good example. If you got cancer and needed a great deal of expensive medical care, you’d be in trouble. There is a way to be self insured for a portion of these risks, though. Get a policy with a large deductible and be self insured for that amount. Let’s say that you can save 0 a month by increasing the deductible on your PPO to 00. Put the 0 a month into your insurance account. Just make sure that you could afford the 00 if it came to that. The same thing works with any type of insurance that has a deductible.
Benefits of Self Insurance
You can pool the money to cover all your risks in one place. It’s unlikely that you’ll suffer any one loss, but it’s even more unlikely that you’ll suffer several losses at the same time. Your emergency fund could serve as your insurance for multiple types of losses.
You get to keep any unspent funds. If you don’t experience any unexpected financial losses, they money is yours to keep. Use it to insure yourself against the next more expensive risk. Each time you do this, you’ll save yourself money on insurance.
You decide what to cover. You won’t have to argue with the insurance company about whether an expense is covered. You’ll decide.
You can pick and choose which risks to self insure and which to buy insurance for. If you’re a risky driver, maybe a good insurance policy is the way to go. You could self-insure against a loss that you think you’re less likely to experience.
Drawbacks of Self Insurance
If you’re not careful, you could end up uninsured. You must put the money aside in case the worst happens. This takes a lot of self discipline. You also have to be careful about how much risk you can really handle. Don’t consider the average claim in making this decision. You must be ready for the worst case scenario, because it might happen.
If you have higher than average claims, this approach will be more expensive for you than buying insurance.
Take a look at all of your risks and decide how best to handle each one. Self insurance is something that you can start small and increase over time. Even a person with an average amount of claims will come out ahead.
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