What is self insurance
It is very similar to the “rainy day” fund that a lot of people have, but specifically for events that insurance companies offer protection from.
Instead of buying insurance for various things in life it is possible to try and set up a pot of money by yourself which gives you the safety net of an insurance policy but also lets you keep the money if you never end up making a claim.
For example instead of buying mobile phone insurance you can put money aside in a bank account and if you get drunk and drop your phone down the loo and it gets water damaged you use this money to buy a replacement. If you manage to keep your phone safe for several years you’ll have a pot of money there to either buy a snazzy new phone with or spend on whatever you need.
If you had bought phone insurance instead of self-insuring then unless you make a claim you essentially lose all the money you’ve put into the policy.
What is the benefit?
There are 3 great benefits to self insuring:
- If the event you’re insuring against doesn’t happen you get all your cash back
- Whilst you have your personal insurance fund going you have the option of putting it into an easy access savings account and earning interest (This is what the insurance company normally does with the money)
- Once your fund is large enough to can stop making monthly payments into it, with a regular insurance policy you need to keep paying forever.
What are the risks?
The main risk for self-insurers is that one of the low-risk large-expense events happen that they are insuring against. e.g. your phone is completely destroyed or lost and needs a full replacement. If the self insurance fund has been going for a long time then this isn’t a problem, but if you’ve only just started then your fund may not have enough money in it to cover this problem. If this happens you’re forced to either accept the loss or find the money elsewhere.
What can I self insure against?
There are 100’s of different things you can get insurance against. The ones that come to mind that might be candidates for self-insurance to most people are:
- Mobile phones – Most people can do this as the amounts required are small enough.
- Pets – Keep in mind that if your family pet gets a problems that requires a very expensive vet appointment you may be put into a tought decision if your fund hasn’t grown big enough.
- PPI – Normally this protects the banks against missed payments. If you’re confident you won’t be missing payments on a loan or credit card then don’t take the banks PPI and set aside a few months payments in a fund yourself.
- Breakdown cover – If you have a newish car you aren’t likely to break down. It might be cheaper to self insure and if you do break down you can still call companies like the AA or Greenflag. They will come to help you but charge a large amount (£150-£200). However if you only break down once every 3+ years this might be cheaper than paying them monthly.
- Home Contents insurance – This is a tricky one as the contents of peoples homes vary massively. If you don’t own much and wouldn’t be too concerned about losing much then this one might work for you, however home contents insurance is so cheap that I think most people would be better off getting a regular policy.
Its worth noting that depending on where you live there are various things you need to get a real insurance company to handle. E.G. in the UK your car insurance needs to be from a real insurance company. Try explaining this article to a policeman who stops you and you’ll soon lose your car.