DOES IT MAKE SENSE TO SELF-INSURE?

Self-insuring means setting aside a sum of money to cover expenses you may incur if the unexpected happens.

Clients always say, how can I lower my insurance premium? Do I really need to carry so much insurance coverage? I have plenty of assets to cover a claim. What they are often saying is, “I’m willing to take on part of the risk and self-insure”. This becomes a cost-benefit analysis and what we consider as a type of gambling. Over the life span of a client, we usually see the house win.

What does it mean to self-insure?

Self-insuring means that you save up enough money to cover the related and possible expenses that may occur in the event that you suffer an unexpected loss, injury, or illness.

When you self-insure, you set aside extra funds to pay for any accidents or bills yourself. You do not have help covering the costs that insurance otherwise would have paid. You are responsible for everything completely on your own. This is an extreme option. We recommend that you still purchase an insurance policy, but opt for higher deductibles and partially self-insure for a portion of a claim.

Putting it simply, this means if your home burns down, you will: 1 – have to pay to rebuild it if you don’t have insurance or 2 – pay for the first portion of the claim out of pocket and allow the insurance carrier to pay the balance of the claim.

If you are sued as a result of a car accident, you’re responsible for paying a lawyer and any settlement. Luckily in most states, auto insurance is required by law so regardless of your risk tolerance, you will still have some sort of auto insurance policy in place.

What are the risks of choosing to self-insure?

An insurance policy is there to protect your finances. It will help protect you from going bankrupt from an illness, accident, or natural disaster. The insurance company will help you if you are sued as a result of someone being hurt on your property or an automobile accident.

When we are speaking with clients we like to explain the risk associated with self-insuring. Many of our clients have a high-risk threshold due to the industries they are in. It is our job in risk management to explain where it may be alright to self-insure and where it doesn’t make sense.

For example: When you are insuring a physical product such as a home, auto, artwork or jewelry you understand that finite loss that you can incur. If you opt not to carry coverage on your collections, you know exactly how much you may lose.

What we never recommend is skimping on liability insurance. This is always the great unknown; you never know how much you could lose if you are in a lawsuit. We realize that when we speak with new clients who usually are with a direct insurance carrier, they have never had a professional explain the ins and outs of liability insurance. This is the least expensive form of insurance to protect your finances. For example, for roughly $750 a year you can purchase $5M in liability coverage. Where else can you spend that little to feel protected?

What are the benefits of self-insuring?

One of the main benefits of self-insurance is, of course, the upfront cost savings. You can save money on high insurance premiums by foregoing some insurance policies in favor of self-insuring. Keep in mind that you’ll have to set aside a good portion of money to pay for any additional issues.

Should I self-insure for car insurance?

It is against the law not to have car insurance, so you can not self-insure for car insurance. Additionally, car insurance protects your assets if you were in an accident and will cover you if you are sued in an accident.

If you want to lower your auto insurance premium, go with a $1,000 or a $2,500 deductible on your comprehensive or collision coverage. You should make sure that the liability coverage is high enough to protect you in the chance you are sued and so that there isn’t a gap in coverage between your auto and umbrella coverage.

Should I self-insure for home insurance?

When it comes to home insurance, we never recommend completely self-insuring. If you want to save money on your home insurance, opt to go with a higher deductible such as $10K or $25K. This way you are lowering your insurance premiums without completely going uninsured. Allow the insurance carriers to cover the heavy burden of a claim. If you can afford a million-dollar home, why would you not purchase a home insurance policy that will cost you between $2,500-$3,500 a year? The numbers don’t add up.

When is it ok to self-insure?

Self-insure for property risk only. Take the whole risk yourself or a portion of the risk in the form of the deductible you choose. Property risks are completely quantifiable depending on how much of the risk you want to take. Liability on the other hand is completely unquantifiable. You could be the cause of a one car accident or be the cause of a fifteen car pileup with injuries. Liability risk is open ended and your exposure to risk can vacillate greatly with the addition of new youthful drivers, swimming pools, performance cars. Don’t leave yourself open to a liability claim.

For more information reach out to Daigle & Travers Insurance. We have three convenient locations in Connecticut: Wilton, Darien, and Westport. One of our many experienced insurance professionals will be able to guide you through the insurance process. We can be reached at 203-655-6974 or at info@dt-ins.com.