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.
Most people rely on an insurance company to protect their finances in the event of damage to their property. You pay a monthly premium, and in return, you can file a claim to help you cover expenses associated with fixing or replacing your property. Can you self-insure your car or home? In some cases, the answer is yes. However, there are some risks associated with choosing self-insurance and it won’t be right for every driver or homeowner. Bankrate’s insurance editorial team lays out the pros and cons of self-insurance to help you make the right decision for you.
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Powered by Coverage.com (NPN: 19966249)
Coverage.com, LLC is a licensed insurance producer (NPN: 19966249). Coverage.com services are only available in states where it is licensed. Coverage.com may not offer insurance coverage in all states or scenarios. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.
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 insurance 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 2024 annual emergency savings report found that 59 percent of U.S. adults are uncomfortable with the emergency savings they have, 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 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
Most states require that drivers carry at least certain minimum levels of liability coverage from an insurance company. Unless you live in New Hampshire, you won’t be able to self-insure for that portion of your insurance. As for how to self-insure your car for other components, it may be possible if you have a healthy savings account.Â
You could choose to get liability coverage through a cheap insurance company and self-insure in lieu of other financial protections, like collision and comprehensive coverage. You could set aside money to repair or replace your vehicle if it is damaged. 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.
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.Â
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?
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 disadvantages.
Advantages of self-insurance
The main perks of self-insurance include:
- Funds availability: In most cases, when you work with an insurance provider, you’ll have to prove your losses. For example, if you get into a car accident, your insurance company will want to inspect your car and evaluate the damage before you can receive any claim payouts. When you self-insure, the money is immediately available to you.
- No policy limits: When you self-insure, you are not subject to any limits of coverage like you could be with traditional insurance. You can choose to save as much as you want or think will be necessary to recover after a loss.
- Flexible fund usage: By self-insuring, you get to decide how your funds are used after a loss, giving you full flexibility to recover in the way you think is best.
- Potential for savings: Self-insurance may give you the opportunity to save money. Without an insurance premium to pay, you could put that money into savings or toward another expense.
- Control over claims: Filing an insurance claim can be time-consuming and complex. With self-insurance you can get damage repaired how you want and on your own timeline.
With fewer limitations on how to recover after a loss and the opportunity to grow your savings, self-insurance may seem like an exciting opportunity. But you should consider the potential drawbacks, too.
Risks of self-insurance
Self-insurance comes with some notable drawbacks, including:
- Planning challenges: A self-insurance plan requires just that: a plan. The most successful self-insurers are those who regularly put money into a dedicated self-insurance account and resist the temptation to use those funds for anything other than covering losses that would have been paid out by an insurance policy.
- Legal ramifications: Your state may have requirements about your car insurance, and your mortgage lender may require a certain level of home insurance. Before you self-insure, make sure you will still be in compliance with requirements that pertain to you.
- Potential for large out-of-pocket expenses: While self-insurance may give you the opportunity to save by not paying insurance premiums, you should be aware that the financial damages from losing your vehicle or home can escalate quickly, sometimes costing tens of thousands dollars or more. Without an insurance policy to help pay for these costs, you will have to pay for damages out of pocket. If you have not saved enough, you could face financial devastation.
- Unpredictability with funds: Because you need to have money available to cover any sort of accident or damage, your money can be locked up for a long period.
Self-insurance, like many financial decisions, 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.
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