What is self-insurance?
Key takeaways
- Self-insurance is not allowed for all types of liability insurance.
- While self-insurance could save you money in the short term, it may be an expensive long-term plan if you cause an accident.
- This type of insurance plan is only viable for someone with a lot of available liquid assets.
Self-insurance isn’t technically insurance. It’s a do-it-yourself approach to auto, home or life coverage where you set aside your own money to cover potential losses, rather than paying premiums to an insurance company for financial protection. While this strategy can save you money if nothing goes wrong, a single accident or freak incident could wipe out your savings — and then some. For many, carrying that kind of financial burden alone can be overwhelming. If you’re thinking about cutting out the middleman and self-insuring your assets, we’re here to help you understand the full weight of the risks and ensure you know when the law still requires traditional insurance.
What is self-insurance?
When you choose to self-insure, you set aside money to cover unexpected events that may impact your home, vehicle or life instead of reaching out to an insurance company to purchase a traditional policy. Self-insurance is an alternative to any type of insurance including home, auto and life, but the legal and financial ramifications of choosing to self-insure are very different depending on the policy type.
The primary perk of self-insuring is that while you are disaster-free, you get to pocket the money you would have paid in insurance premiums. This can end up saving you a lot of money, especially if you don’t incur a financial loss. The major drawback, though, is that when you do face an unexpected loss, the full burden of financially recovering from it falls to you. Depending on the policy type you’re opting out of, this cost could be in the hundreds of thousands of dollars.
In the worst case scenario, you might be solely responsible for the cost to rebuild your home following a total loss or be financially liable for someone’s injuries after a car accident. Considering that Bankrate’s 2025 annual emergency savings report found that only 46 percent of U.S. adults have enough saved to cover three months of expenses, self-insurance is not a reasonable financial plan for most drivers or homeowners.
What are the different types of self-insurance?
Self-insurance can apply to most types of insurance including car, home and life. However, most states have traditional car insurance requirements, and you may also be required to purchase a home or auto insurance policy if you finance your car or home. If you are wondering where you might be able to implement self-insurance in your own life, below are some policy types that self-insurance can supplement or replace.
Car insurance
Every state except New Hampshire requires drivers to carry minimum levels of liability coverage from an insurance company. This means you cannot do self-insured car insurance for liability coverage — unless your state allows alternatives like making a large cash deposit with the DMV or posting a surety bond as a financial guarantee. This option is generally only available to high-net-worth individuals or businesses with fleets of vehicles.
You could, however, choose to get liability coverage through a cheap insurance company and self-insure in lieu of other financial protections, like collision and comprehensive coverage. This would mean that, while you have a traditional insurance policy for your liability coverage, you would be self-insuring for the damages to your own vehicle. Just keep in mind that any damage you cause above your liability limits will also come out of your pocket.
This may not be an option for you if you have a loan or lease on your vehicle, as your lender will likely require that you carry full coverage car insurance. It could also be relatively expensive to repair or replace your car, so you may want to compare the level of savings you would need to what you would pay for a traditional car insurance policy in your state.
Homeowners and renters insurance
If you have a mortgage, most lenders require you to carry homeowners insurance. But if you own your home outright, you may be interested in establishing a self-insurance plan.
Repairing damage to your house can be costly, so this option works best if you already have a significant amount in savings. If your home is destroyed and you self-insure, you will likely want to have enough money to pay for the rebuilding costs of your house as well as to replace any of your belongings that were damaged. Most homeowners do not have the disposable income to pay for an expense of this magnitude.
Self-insurance may also be an option for renters. Rather than buying renters insurance, you may choose to self-insure. Instead of paying a monthly, quarterly or annual premium, renters who self-insure instead earmark a certain amount of savings to pay for damages. When the unexpected happens, these renters can tap into those savings to replace their belongings instead of filing a traditional insurance claim. Many landlords require their tenants to have renters insurance, though, so this may not be an option for you.
Additionally, your home and personal property are not the only things covered by a traditional insurance policy. If you self-insure, you should also consider the costs associated with causing damage to someone’s belongings or someone getting hurt on your property. These costs could include medical bills, legal fees and the repair or replacement cost of damaged items. A homeowners or renters insurance policy covers these situations with personal liability coverage, but if you self-insure, the burden of these costs would fall to you.
Insurance for disasters like floods and earthquakes
Homeowners insurance typically excludes damage caused by earthquakes and floods. Rather than adding an endorsement or buying a separate policy to protect your home against these disasters, you may choose to self-insure. Not all states are as prone to earthquakes and floods though, so if you live in an area where earthquakes and floods are very rare, self-insurance may be an option to consider.
You will also want to carefully evaluate your home’s risk for certain disasters. If your home is in a low-risk flood zone or is substantially elevated, for example, flooding may not be a major concern. But if your home is located on a flood plain, you should know that even one inch of water can cause up to $25,000 in damage to your home. If you do not readily have that amount at your disposal for repairs, you may be better served by purchasing a flood insurance policy.
Additionally, if you have a mortgage on your home and are in a high-risk area for these disasters, you may be required to have traditional insurance coverage. However, this is not always the case. Lenders in California, for instance, don’t require you to have earthquake insurance to get a loan. It’s just a good idea. If you choose to self-insure for earthquake damage, consider first that foundation damage to a home can cost thousands of dollars to fix.
Life insurance
Life insurance is designed to provide your loved ones with a financial cushion should you pass away, but a traditional life insurance policy may not be the right choice for everyone. Some people choose to self-insure for their life insurance, setting aside money throughout their life that will be left to their loved ones.
There are a lot of factors to consider when it comes to your life insurance, whether you choose to self-insure or purchase a traditional policy. The amount of money you’ll want to leave behind will vary based on your family’s situation. A few things to consider are whether you are the primary source of income in your household, if you care for someone with a disability and the amount of debt you owe. You’ll want to ensure you save up enough to cover your funeral expenses, replace your salary for your loved ones, pay off debts or leave behind a financial gift.
Is self-insurance right for you?
Now that we’ve answered the question ‘can you self-insure your car or house?’, the more important question to focus on is, should you? Generally, a self-insurance plan is best for those with a large pool of readily available assets and exposure to minimal risk. For example, an individual who has significant savings and no debt may choose self-insurance if paying high premiums to insure against the possibility of an unlikely, costly event doesn’t appeal to them. Or a family with a second home may choose to self-insure the second residence, knowing it could sit vacant while they save up for necessary repairs.
As with most financial decisions, self-insurance has advantages and risks, as outlined in the table below:
| Advantages of self-insurance | Risks of self-insurance |
|---|---|
| No premiums: There are no monthly premiums to maintain a dedicated self-insurance fund. | Large out-of-pocket costs: If you don’t save enough, a major loss (like a house fire) could be financially devastating. |
| No policy limits: You are free to save as much as you think will be necessary to recover after a loss. | Planning challenges: You must consistently contribute to a self-insurance fund and avoid spending the money for other purposes. |
| Control over claims: Without needing to go through an adjuster, you have immediate access to your self-insurance funds to recoup losses as you see fit and on your timeline. | More vulnerable to lawsuits: If you’re at fault in an accident or an injury occurs on your property, people may sue you directly since there’s no insurance company to absorb or fight the claim. |
| Potential for savings: By avoiding losses, you keep the money instead of paying it to an insurer. | Legal ramifications: Self-insurance isn’t legally permitted in all situations, so it’s important to make sure you are in compliance with requirements that pertain to you. |
| Investment opportunities: You can deposit your self-insurance fund into a liquid, low-risk investment tool (like a high-yield savings account) to grow your financial cushion. | Emotional toll: For some, the stress of potentially having to pay fully out-of-pocket for their most valuable assets is too much to handle. |
Self-insurance is multifaceted and depends on a number of factors. While it may be a good decision for some, it likely does not fit with all scenarios. If you are unsure if self-insurance is right for you, talking to a financial advisor may be beneficial.
What real people are saying about self-insurance
Insurance is all about managing risk. The more you pay in premiums for broader coverage, the less financial risk you typically face. Self-insurance sits at the opposite end of that spectrum — you pay no premiums, but take on the full risk if something goes wrong.
Reddit users in the r/Insurance and r/FirstTimeHomeBuyer forums often ask if the risk of self-insurance is worth the reward, but many commentators, including the ones below, pose their arguments for why it’s generally a bad idea for home coverage, though car insurance may offer more room for nuance.
Reddit user review
*The quotes and citations included on this page have been verified by our editorial team and are accurate as of the posting date. Outlinked content may contain views and opinions that do not reflect the views and opinions of Bankrate.
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