Self-Insure

What is Self-Insure?

Self-insure is a risk management technique in which a company or individual sets aside a pool of money to be used to remedy an unexpected loss. Theoretically, one can self-insure against any type of damage (like from flood or fire) In practice, however, most people choose to purchase insurance against potentially significant, infrequent losses.

Understanding Self-Insure

Self-insuring against certain losses may be more economical than buying insurance from a third party. The more predictable and smaller the loss is, the more likely it is that an individual or firm will choose to self-insure. For example, some tenants prefer to self-insure rather than purchase renter's insurance to protect their assets in the rental.

  • If you have no debt and a considerable amount of assets, you could consider self-insuring for life insurance.

The idea is that since the insurance company aims to make a profit by charging premiums in excess of expected losses, a self-insured person should be able to save money by simply setting aside the money that would have been paid out as insurance premiums. But it is critical to amass and put aside enough funds to cover you, your family, and your possessions if an accident or natural catastrophe occurs.

Key Takeaways

  • Most people decide to buy some form of auto insurance and health insurance from an insurance company rather than self-insure against car accidents or severe illness.
  • Most states, with the exception of two, legally require you to have auto insurance or carry a bond to cover damages. 
  • The Affordable Care Act requires every American to carry some form of health insurance but there is no longer a penalty tax associated with it.

Example of the Self-Insure Method

For example, the owners of a building situated atop a hill adjacent to a floodplain may opt against paying costly annual premiums for flood insurance. Instead, they choose to set aside money for repairs to the building if in the relatively unlikely event floodwaters rose high enough to damage their building. If this occurred, the owners would be responsible to pay out-of-pocket for damages caused by a natural disaster, like a flood.

Similarly, a small business with two employees may opt against paying health insurance premiums for them. Instead it will self-insure them. This plan will generally take the form of a trust. Instead of an insurance company managing the investment and returns from premiums, the employer becomes responsible for the task.

Pros and Cons of the Self-Insured Method

When a person decides to self-insure, they run the risk of not having enough money to cover damages or medical care. Experts recommend always carrying a form of automobile insurance, even if you live in the two states that do not require it (Virginia and New Hampshire), insurance on your home, and medical insurance for you and your family.

It is possible to carry a bond instead of auto insurance in some states, but you are still financially responsible if you are in an accident, mainly if you are found at-fault. Paying for insurance is a safety net for you, your possessions, and your family. If you choose to self-insure, you may save money over the years. The downside? You must be willing to commit to saving a lot of money to protect yourself from emergencies—such as fire, floods, accidents, and even death.

In its original form, the Affordable Care Act (ACA) mandated penalties for individuals and small businesses that were not insured. According to some reports, this led to an increase in the number of self-insured businesses. Leading insurance companies have also begun offering alternate funding mechanisms for insurance. For example, one such plan calls for back-up insurance to stem losses from claims. Starting with the 2019 plan year, people without healthcare insurance do not have to pay a "shared responsibility payment".

Article Sources

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  1. Virginia Department of Motor Vehicles. "Uninsured Motor Vehicle Fee." Accessed Feb. 6, 2021.

  2. New Hampshire Department of Safety, Division of Motor Vehicles. "Financial Responsibility: Insurance Requirements/SR-22." Accessed Feb. 6, 2021.

  3. Employee Benefit Research Institute. "Employer Trends in Self-Insured Health Plan Coverage." Accessed Feb. 6, 2021.

  4. HealthCare.gov. "No Health Insurance? See If You'll Owe a Fee." Accessed Feb. 4, 2021.

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