When to Self-Insure: How to Know If Self-Insurance Is Right for You
Risk is a constant part of life. It shows up in your daily commute, your investment choices, and even everyday lifestyle decisions. Some risks can be transferred to an insurance company, such as auto or homeowners insurance. Others, you choose to assume yourself.
What is self-insurance?
Self-insurance is when you choose to bear the financial burden of an adverse event yourself, rather than transferring that risk to an insurance company.¹ Understanding self-insurance, and when should you self-insure, can help Fort Myers and Southwest Florida residents make smarter decisions about which risks to transfer and which to keep.
What Does It Mean to Self-Insure?
To self-insure means accepting some or all of a financial risk on your own, instead of paying an insurer to take it on.
You can self-insure in two ways:
- Fully self-insure – assume the entire financial risk yourself.
- Partially self-insure – assume a portion of the risk while transferring the rest.
A common example of partial self-insurance is the deductible on your insurance policy. Your deductible reflects the portion of financial risk you’re willing to take on before your insurance coverage begins.
Self-Insurance vs. Insurance: What’s the Difference?
Understanding self-insurance vs. insurance comes down to who carries the financial risk:
- Insurance – You pay premiums to an insurance company, which agrees to cover specified losses.
- Self-insurance – You set aside your own funds to cover potential losses instead of paying an insurer to assume that risk.
Most people use a blend of both. For example, you may carry auto insurance for major losses while self-insuring smaller risks through your chosen deductible.
How Self-Insurance Works: 2 Action Steps
If you’re considering a self-insurance strategy, there are two key steps to take.
Step 1: Manage the Underlying Risk
Before you self-insure, look for ways to reduce the likelihood or severity of a loss. Examples include:
- Installing a home alarm system
- Avoiding texting and driving
- Maintaining your vehicle or property to prevent losses
Step 2: Build a Self-Insurance Fund
Once you’ve taken steps to manage risk, the next step is creating a cash reserve, often called a self-insurance fund, to cover expenses tied to any losses you may experience.
Self-Insurance Strategy: Tips to Manage the Costs
If you decide to self-insure, these strategies can help you manage costs effectively:
- Adjust your deductible. Your deductible is one of the biggest factors in how an insurance policy is priced. Generally, a higher deductible means a lower premium, because you’re agreeing to self-insure a larger portion of the risk.
- Selectively assume risk. Ask whether certain coverage is truly necessary. For example, does an older vehicle still need collision coverage, or is an extended warranty worth the cost?
- Extend your waiting period on disability insurance. Choosing a longer waiting period before benefits begin, such as 90 days instead of 30, means you’re self-insuring the difference. This can potentially lower the cost of your policy.²
Where to Keep Your Self-Insurance Fund
The reserve fund you set aside to cover potential losses should be kept in highly liquid assets, such as money market mutual funds, so the money is accessible when you need it.³
Money market mutual funds are sold by prospectus. Consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
When Should You Self-Insure?
Ultimately, whether to self-insure, and to what degree, depends on how much financial risk you can comfortably afford to take on. This is a personal decision that varies based on your income, savings, and overall financial picture.
For residents of Fort Myers and the greater Southwest Florida area, a financial professional can help evaluate your specific risks and determine which self-insurance strategies make sense for your situation.
Frequently Asked Questions
What is self-insurance?
Self-insurance means choosing to bear the financial cost of a potential loss yourself instead of transferring that risk to an insurance company through premiums.
What is self-insured car insurance?
Self-insured car insurance refers to assuming some or all of the financial risk associated with your vehicle yourself, such as choosing a higher deductible or forgoing certain optional coverage like collision on an older car, rather than paying an insurer to cover that risk.
How do I self-insure?
To self-insure, first take steps to manage the underlying risk, such as installing safety measures or practicing safe habits. Then, build a cash reserve in a highly liquid account to cover potential losses if they occur.
What is a self-insurance fund?
A self-insurance fund is a cash reserve you set aside to pay for potential losses you’ve chosen to self-insure. It’s typically kept in liquid assets, like money market mutual funds, so funds are available when needed.
When should you self-insure?
You should consider self-insuring when you can comfortably afford to absorb a potential financial loss on your own, and when doing so may reduce your overall insurance costs, such as through a higher deductible or longer waiting period.
What’s the difference between self-insurance and insurance?
With insurance, you pay premiums to a company that assumes your risk. With self-insurance, you set aside your own funds to cover potential losses instead of transferring that risk to an insurer.
1. Self-insuring is an insurance strategy based on certain assumptions. It is not intended to provide specific insurance advice. The types of insurance examples and approaches illustrated may not be suitable for everyone. A financial professional can help with a risk evaluation.
2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Federal and state laws and regulations are subject to change, which may affect after-tax investment returns. Please consult legal or tax professionals for specific information regarding your individual situation.
3. Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share; however, it is possible to lose money by investing in a money market fund.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult a legal or tax professional for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
