How to Self-Insure

Some people go around the issue of paying expensive monthly premiums by self-insuring. This is a good idea for some, while a nightmare for others. To determine which side you belong to, it helps to understand the concept of insurance first.

In brief, insurance is a kind of protection that you purchase for something that could cause a financial loss. Actuaries and underwriters work for the insurance companies to assess the risks of financial loss based on the actual data of claims paid. Premiums are charged in a way that the company will have enough money to pay out in claims but also save to make a profit.

If you do not want to be a part of this business, you can self-insure. Everyone is already self-insured to some extent. Anytime you do not have an insurance policy covering a risk, you are self-insured. This means you take full responsibility for the protection of your assets and accept the financial risks potential losses may bring.

For example, if you do not carry life insurance, you are self-insuring your life. If your family lacks the finances to cover the financial impact of your death, them this is one example when self-insuring is not a good idea.

However, if you have enough money to cover a loss of income, personal property, or in general can afford to pay the costs related to certain expenses using cash or savings, then you can self-insure. As long as you can take care of a situation comfortably, you can self-insure. It is a good way to reduce insurance costs.

You can do this by making sure you have enough money to cover your losses in savings and assets or build a self-insurance reserve or emergency fund. How much this has to be depends on your needs. Think about what you want to self-insure for and put away that much.

Now if you are looking at self-insurance because you are struggling to pay your premiums, carefully consider your choices because deciding to self-insure is different from not having insurance at all. Self-insurance is an option if you can take on risks yourself. Cutting out premiums without the ability to cover losses is simply being uninsured. Approach carefully and make sure you have adequate protection, whether you choose to keep your insurance or decide to self-insure.

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MJ Usner