Is It a Good Idea to Self-Insure?

theory behind insurance—car, home, renters, health, life, etc.—is to purchase protection, with monthly premium payments, for an event that could cause a severe financial loss you would not be able to pay for on your own. However, if you end up never needing the coverage, it can feel like you wasted all of that money in monthly premiums. One solution to save money and still have protection against loss is to become self-insured.

How self-insurance works

Whenever you don’t have an insurance policy covering a risk (that your house will flood, that someone will burgle your apartment, etc.), you are self-insured because you are accepting full financial responsibility for replacing and/or repairing your assets. The difference between being self-insured and being uninsured is having enough savings, investments, or assets to cover a loss.

Self-insurance requires a large savings account or other liquid assets that can be used to pay for a loss. In general, the more predictable and smaller the loss, the more likely a person will choose to self-insure because it’s easier to pay for. For example, a renter might prefer to self-insure rather than purchase renter's insurance to protect their assets in the rental.

Self-insurance is, in general, risky in the short-term before you’ve saved up enough money to cover any loss or expenses. Someone might choose to continue traditional insurance coverage until they’ve saved or invested enough money. Even once you have sufficient assets saved or invested, it’s possible you could deplete those financial resources if you need to pay for multiple losses or damages in a row.

The benefits of self-insuring include being able to invest the money saved on monthly premiums and being able to raise the deductibles on the insurance you can’t avoid paying—which of course means your premiums on those plans will be lower.

Who should self-insure

Self-insurance isn’t a good idea when you don’t have enough money to cover the financial impact of a loss of income, loss of life, or loss of personal property. Sit down and calculate the financial impact of forgoing traditional insurance and the scenarios it would cover. Do you have the financial capability to provide for yourself and your family, repair the damage, or replace the loss?

If you’re considering self-insuring because you struggle to pay traditional insurance premiums, a word of caution: saving a few dollars each month isn’t worth jeopardizing your financial security. The bottom line is when you decide to self-insure, you need to be willing to risk paying for it all or accepting the loss.

Types of insurance you should not self-insure

Ways you can use self-insurance

Even with the coverage listed above, you can opt to self-insure for other types of insurance coverage. Or you can choose reduced coverage options or higher deductibles across all insurance plans. Consider the following options:

Becoming self-insured can be the right move for you if you have enough savings and assets to pay for expensive repairs, replacement costs, or bills due to an accident or other unfortunate event.

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