When to Self-Insure
One reality of life is that risk is ever present. It exists in our commute to work, in our investment choices, and in our lifestyle decisions. Some risks can be transferred to an insurance company (e.g. auto or homeowners), while others we assume ourselves.
When you choose to bear the financial burden of an adverse event, you are engaging in self-insurance.1
You may self-insure by assuming the entirety of a financial risk, or a portion of it. For example, the deductibles you have on your insurance policies are an expression of the portion of financial risk you are willing to assume.
If you want to self-insure, you should consider two action steps.
The first is to attempt to manage risks, such as installing a home alarm or not texting and driving.
The second step is to create a cash reserve to have available for expenses that are associated with any losses you may suffer.
If you choose to self-insure, here are some tips that might help you manage the costs:
- The deductible you choose is one of the major factors in pricing an insurance policy. Generally, the higher the deductible, the lower the cost of the insurance.
- You can choose to selectively assume all the risk. For instance, do you really need to purchase extended warranties? Does your 14-year-old car need collision coverage?
- Consider lengthening the waiting period before payments begin on disability insurance. By choosing to wait, for example 90 days before beginning benefit payments rather than 30 days, you are self-insuring the 60-day difference, which potentially can reduce the cost of a policy.2
The reserve fund you may create to pay for potential financial losses should be kept in highly liquid assets, such as money market mutual funds.³
Money market mutual funds are sold by prospectus. Please 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.
Ultimately, the decision to self-insure—and to what degree—will be a function of how much risk you can afford to take on.
1. Self-insuring is an insurance strategy based on certain assumptions. It is not intended to provide specific insurance advice. Keep in mind that 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 have an impact on 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.