Personal Finance Advice

With insurance rates rising, I know more and more people who are choosing to insure themselves. Rather than paying premiums to an insurance company, they choose to instead save those premiums and other funds in order to cover any damage to their cars or property or, in some cases, to pay for health care. I saw an interview with a man who lived in a flood prone area of the Mississippi River. His riverfront house had just washed away for the third time and the reporter asked him if he had insurance to cover the loss.

“Heck no,” he said. “After the first flood they refused to cover us.”

“But isn’t that expensive?” the reporter asked.

“Sure. But we don’t want to live anywhere else. So we keep enough money to cover the rebuilding and replacing and we never own anything we can’t afford to replace on our own.”

I had to admire his ability to provide that kind of security for himself, as well as his attitude. He knows where he wants to live and that’s so important to him that he’s willing to limit his overhead to no more than he can afford to replace on his own. It seems strange now, but it wasn’t all that long ago that people lived that way all the time. Insurance is a relatively new invention.

I know another man who is in robust health, yet he’s seventy years old. He has no health insurance, preferring instead to pay for everything out of pocket. I asked him once if he didn’t feel that was pretty risky.

“Yeah,” he said. “But I’ve been saving all the money I could have paid the insurance company all those years plus more and I have enough to see me through a total health meltdown, now.”

“What did you do when you got sick?” I asked.

“I’m fortunate to be very healthy. My whole family has good genes. No one’s ever been really sick or had a terrible disease. I take good care of myself; never smoke or drank and ate healthy food and exercised. I’ve had minor illnesses, but nothing I couldn’t pay for on my own. So that’s what I did. I paid for everything myself. If I had been a more sickly person, I probably would have paid for the insurance but I just decided not to.”

He shrugged, casually dismissing something (health insurance) that most of us live in fear of losing. And he never wanted it. It’s an amazing attitude, and certainly not for everyone. But it works for him. And it works for many other people, as well. Many people dismiss life insurance, health insurance, auto insurance or homeowners insurance in favor of saving enough money to pay for things themselves. It’s not an unheard of proposition, but it does require you to keep a large amount of money set aside “just in case.” And you need to understand risk management so that you know exactly what you’re getting into when you decide to go without insurance and pay as you go.

The benefit of self insurance is that you are insulated from random rate jackings of your insurance premiums. You are no longer a slave to a company that can penalize you for making too many claims or living in the wrong area. You are also protected because you never have to worry about the solvency of your insurance company. With more and more companies having financial trouble and pulling out of states they deem too risky, it’s not inconceivable to think that your insurance company might not be there when you need them. With self insurance, you remain in control of what you pay and when. The downside, of course, is that you may pay. A lot.

So what should you consider if you’re thinking about being your own insurance agent?

Are you at high risk? If you live in a storm prone area, for example, going without home or flood insurance may be riskier than you want to try to cover on your own. If you are genetically predisposed to a debilitating disease, keeping your health insurance may be the better choice. You need to understand exactly what your risks are and how much it will cost to cover those risks. People who have less risky jobs, solid health backgrounds, or live in low risk areas are better candidates for self insurance than those who face a lot of risks every day.

What does your state or municipality require you to have? Most states require at least liability insurance on your car. Some require it for your home, as well. Some states now have laws that citizens must have health insurance, no matter how much money they may have. If it’s required by law, you won’t be able to self insure, even if you want to.

If you have a mortgage or car payment, the lender is going to likely require that you have insurance to cover full catastrophic damage to their property. And the policy is going to have to name the lender as the beneficiary of the funds. Even if you have the money to self-insure, the bank is going to want to make certain that their investment is covered.

Do you have enough saved to cover the worst case scenario? If your home burned to the ground, could you pay to rebuild and replace the contents out of pocket? Sure, you may have enough saved to replace a roof or repair some hail damage, but can you replace the whole thing? If you get cancer, can you pay for all of the treatments? You might be able to pay for physicals and small surgeries, but can you cover a catastrophic illness? If the answer is no, you might be better off carrying insurance until you can save up enough to cover a catastrophe.

How comfortable are you with risk? Some people can handle major risks without undue stress. Others need to have everything completely covered in order to feel safe. If you aren’t okay with risk, self insurance probably isn’t for you. Insuring yourself is risky, no matter how healthy you are, or how well you drive.

What’s your long term prognosis for generating (and keeping) cash to use for insurance? Do you have the ability and discipline to accumulate large sums of cash and to not touch it unless you need it for insurance purposes? If you tend to spend money recklessly, self insurance might not be for you. Similarly, if you face a lot of unemployed or furloughed time, you may not be able to save up the sums needed. Do you have other obligations, such as child support or large debt payments, that might require you to dip into your insurance funds? There are plenty of things that can derail your self insurance plans so it’s best to be as certain as you can be that you will have your insurance money if you need it.

If you decide you’re not ready to completely insure yourself, you may be able to still reduce your insurance costs by partly self insuring. If you have a lot of money available to pay for minor and some major things (but not total catastrophe), take out policies with very high deductibles. They’re usually cheaper. If you can’t self insure everything, maybe you can afford to self insure your cars or home, if not your health. Figure out what you can cover and drop the coverages you no longer want to carry. Maybe you only want to keep special coverage, such as liability or umbrella policies, and drop everything else. Liability insurance and umbrella policies protect you from lawsuits which are unpredictable in their amounts. You may know that your car costs $10,000 to replace and your home $300,000 but if you face a lawsuit because someone is hurt on your property or by your car, the verdict could range from several thousand dollars to millions. You may choose to retain insurance to cover those unknown risks. You could also look into ideas such as dropping major medical insurance but keeping a cancer policy, for example. If you have the money to cover your routine medical care but only need extra to supplement you in the event of a terrible diagnosis, there are options available.

Obviously there is a lot to consider when deciding whether or not to forgo some or all of your regular insurance coverage. Only you know what is right for your financial situation and level of risk. There are legal implications to consider, as well. If you’re considering self insurance, consult a lawyer, financial planner, and/or an insurance agent to discuss exactly what you’re getting yourself into. If it works for you, it’s a great way to get away from the clutches of an insurance company.