Insurance is often an essential but costly expense. For instance, car insurance can average $1,718 annually for full coverage, while health insurance may exceed $1,000 monthly depending on factors like age and circumstances. Home insurance, averaging about $2,000 yearly, also adds to the financial burden. While insurance can be a financial lifesaver in the event of a claim payout, not all policies are equally necessary.
Self-insurance offers an alternative approach: instead of paying premiums to an insurer, you set aside money to cover potential future costs on your own. This method applies to items not covered by insurance policies, such as personal belongings or specific aspects of your vehicle or property.
The primary advantage of self-insurance lies in retaining the money that would otherwise go towards premiums, allowing it to accrue in an interest-earning account. If a problem arises, you have funds readily available. If not, the money remains yours, unlike premiums paid for policies that never yield a payout.
However, self-insurance is viable only in specific circumstances, typically when you have sufficient liquid funds. For instance, if annual flood insurance premiums amount to $1,000, dropping the policy and investing the money instead could seem appealing. Yet, if the average flood claim exceeds $66,000, the financial risk of self-insuring becomes apparent.
Therefore, self-insurance makes sense in scenarios where:
- Car Insurance: If your vehicle is older and of low value, and you can manage repairs independently, opting out of comprehensive coverage may be prudent.
- Jewelry: Many homeowners’ insurance policies cover jewelry up to a limited amount. If your jewelry’s value falls within this limit, self-insuring might be more economical.
- Life Insurance: If you have substantial assets generating income or your family’s financial needs are secure without your income, life insurance may be unnecessary.
In each case, having liquid assets readily available to cover unexpected expenses is crucial. While self-insurance can save money over time, it requires careful consideration of potential risks and financial capabilities.
