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When Can You Self Insure?

We have written in the past about the importance of insurance of all types.  When you are young you need many types of insurance, but as you get older you begin to get to the point where you can self insure.  Instead of purchasing insurance you can afford to take the risk of loss while saving your insurance premium.  But what can you afford to self insure and when?

Self Insurance Possibilities

Many types of insurance are focused on protecting a specific asset.  The insurance you get protects a specified amount of potential future expense.  These are the type of scenarios where you can consider self insuring.  When the potential loss is such that it will be insignificant compared to either the cost to insure or your total assets, then it is probably time to self insure.  But what types of insurance meet this definition:

Collision Insurance

Collision insurance protects the value of your car in an accident.  If your car is inexpensive and a small percentage of your total assets you may choose to forgo collision insurance.    The risk of course is if your car is totaled you have to pay out of pocket for a replacement.  Still it might be worth it for the savings on your insurance rates, especially for a beater car.

Comprehensive insurance

Comprehensive Insurance covers things like hitting a deer, hail, a tree branch falls on your car, or a vehicle gets stolen.  Basically the things that happen that are not related to you or another drivers actions.  Like Collision insurance the real question here is the value of the car compared to the cost of replacement as well as the impact of that replacement on your assets.  If you can honestly say replacing your car won’t be a significant loss then you can cut back here.

Property Damage Insurance

Property damage insurance is yet another type of car insurance.  This insurance pays for the damage your car inflicts on other cars or property during an accident.  The dollar amount for self insuring this one is likely higher than collision insurance as you could do extensive damage if you crash into an expensive car on the road.  Still there does come a point where it is unlikely you will do more damage than a certain number.  If you can shake off a $200,000 to $300,000 bill then you might be able to self insure here.  All others need not apply.

Disability Insurance

Disability insurance is meant to replace your paycheck should you be injured and no longer able to work.  In fact it typically pays out in reference to your current pay and your ability to work.  So if you are financially independent you probably do not need disability insurance to replace your paycheck.  Save your money from this expensive insurance for other things.  If you are earlier in your career and not financially independent, especially if you have a family, having this should be a priority.  This is one my biggest mistakes from earlier in my career, I got lucky despite not carrying this insurance.

Life Insurance

The purpose of life insurance is also to replace a paycheck or work, in this case for a surviving spouse or loved one when you leave this plane of existence.  Again if you are financially independent you can forgo this insurance.  An important note though, being a stay at home mom does not mean life insurance is not necessary.  Child home care is a form of work, so at minimum the stay at home mother should be covered by a policy that would cover child care if you are not financially independent.

Gap Insurance

This fancy sales product covers the difference between your car value and what you owe in case of a car accident.  Collision insurance only pays the cars value so you can be on the hook for significantly more if you owe more on the car then it is worth.    If you buy a new car and its a huge portion of your assets you may want to consider this one.  However, you probably should not do this anyway.  If you buy a less expensive car and put a decent amount down then you really don’t need this one in the first place.  For this reason this insurance made my list of Insurance You Should Never Purchase.

Long Term Care Insurance

Long term care itself is expensive, but so is the coverage.  It essentially covers your care if you become disabled and need a care giver.  Given the price can range into the thousands per year the equation can tip in the direction of self insure fairly easily if you put away the premiums into investments for a later date and start young.  At the very least at true financial independence you can potentially consider forgoing this one.

Owner Title Insurance

Owner title insurance protects you against issues in titles to real estate.  For example older easements, liens, or other issues with a title may end up costing an owner significantly.  Owner Title Insurance covers those costs that may come up as result of these and many other title issues.  This insurance is rarely used, but forgoing it may end up costing as much as the entire value of the house.  If you have the funds necessary to walk away from the house you just bought, or more likely if you have no skin in the game because you put no money down on an interest loan, then you can self insure here.  All others should buy the insurance.

Vision Plans

Vision plans only actually cover a checkup and a pair of glasses/contacts on a schedule.  You are essentially prepaying.  If anything really goes wrong with your eyes it will be covered by Health Insurance.  As such you should weigh whether it is cheaper to buy the plan or pay out of pocket for the checkup combined with glasses from somewhere cheap like Zeni Optical.

Do Not Self Insure

Other items are not self insurable, or at least you probably should not.  Most of these fall into the liability bucket.  Basically large payouts with potentially no limits, namely liabilities, should always be protected against.  At very least you should have enough coverage to hire a lawyer to protect your assets via your insurance company.  I actually recommend instead of decreasing these you increase them by getting umbrella insurance on top of them.  Common insurances where this applies are:

 Renter or Homeowner Insurance

I know, your thinking when your young you have very few assets, so why do you need to insure your apartment or your home.  You might even be thinking I’m financially independent so I can afford to replace everything I own.  That’s all fine and good but renter and home insurance also covers liability if someone else gets hurt on your property and decides to sue.  Given that meets our definition of potentially unbounded expense due to liability means you should never self insure these.

Health Insurance

While not strictly an unbounded legal liability, health issues can cause an unbounded financial liability.  You never know if you could be one of the unlucky who gets a short or long term debilitating disease that requires expensive treatment.  Some diseases these days require pills priced more than a car.   Very few if anyone can afford to truly self insure health insurance and it’s not worth it to roll the dice.

Auto Liability Insurance

Your car may be cheap, but if you hit someone with it and they sue it could be very costly.  Even if you have no money they could put a lien against your future earnings.  It’s just not worth the risk.

Did I miss any insurance types you are curious about?  Any conclusions you disagree with?

9 Comments

  1. Dan
    Dan May 16, 2018

    Regarding self-insurance of automobile insurance products. In many states, you must post a surety bond with the state DMV when self-insuring. The bond must be in the amount of the state’s minimum coverage amounts or some other amount. The cost of acquiring the surety bond can be significant. An alternative is to post the entire amount in cash with the sate DMV.

    Also some states only allow a subset of car owners to self-insure. Many states have a criteria of minimum number of registered vehicles. For example, you must have 25 or more registered vehicles in order to self-insure. This is because the self-insurance provision was intended for car fleets that large companies and government agencies typically maintain.

    • FullTimeFinance
      FullTimeFinance May 16, 2018

      Didn’t know that. I still don’t think it would be a good idea to self insure the liability eligible or not.

      • Dan
        Dan May 16, 2018

        Many policies are bundled meaning you get Comprehensive, Bodily Injury, Property Damage, etc. as a package. You don’t save any if you take the Comprehensive & Property Damage coverage from minimum offered to zero. If you are going to insure Bodily Injury, it’s no additional cost to get minimum coverage for Comprehensive & Property Damage. This reduces the economics of self-insuring some of your auto insurance but get third party coverage for the Bodily Injury.

        Keeping Comprehensive & Property Damage at minimum coverage levels is a form of partial self-insurance and may be cheaper than full self-insurance. Any claim above the coverage amount will likely result in a lawsuit for which you are solely responsible.

        Also, mutual incompatible are umbrella policies and self-insurance. Many umbrella policies require home/rental & auto insurance policies.

        • FullTimeFinance
          FullTimeFinance May 17, 2018

          Real world example I drop everything but liability on the Vette in the winter and save about 300 bucks a year. Can’t drop it all since In Delaware you can’t tag without liability insurance. Then again I don’t drive it during that period so my risk is 0.

  2. Doc G
    Doc G May 16, 2018

    Great list. The idea of self insuring never crossed my mind till recently! I’m glad I learned more and now know better.

  3. Nic
    Nic May 20, 2018

    What are your thoughts on umbrella insurance? I currently carry this because I own a rental property and I have 2 teenage boys who drive. It is up for renewal this month. My father lost his business because of some fine print in his policy. He has since carried umbrella insurance and has suggested I do the same. Thanks!

    • FullTimeFinance
      FullTimeFinance May 20, 2018

      I think umbrella insurance is one of the best insurances you can buy to augment your home and auto insurance. Especially with a rental property and 2 teenage drivers, I might even increase the amount. You can read more on my thoughts here: http://fulltimefinance.com/importance-umbrella-insurance/

  4. Xrayvsn
    Xrayvsn May 29, 2018

    Came across this post and it was quite informative. The long term care insurance section was especially of interest. There are so many concerns about long term care insurance (rapidly rising premiums and the risk of the insuring company to even be around when you need it).

    I do hope to go through the self insure route. Do u have you have a guideline as to what would be adequate amount to say that you would be self insured especially if this is likely not needed for me for decades (I’m 47)

    • FullTimeFinance
      FullTimeFinance May 29, 2018

      You can find more on the data I came across here: http://fulltimefinance.com/insurance-never-purchase/
      The data I found denoted about 21% of seniors will ever use these policies since most stay for less then 90 days. The costs average about 3K a year for a plan according to the WSJ. At a typical cost of long term care of 250 dollars a day a few decades of putting the premium into savings and you can cover most expectations of long term care need. A quick back of the envelope 6% return shows you’ll have 42K in premiums saved up after 10 years, or 168 days of long term care. Ive seen slightly different stats from Forbes but the results are not far off regardless of source.

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