Maybe your insurance agent has used this term with you, but most people are not entirely clear on what it means. Self-insurance is a pretty simple idea, but it's also an important one to understand.
Self insurance is when a person or a business accepts the risk of financial loss and depends on savings or statistics to safeguard them. If you've ever suffered a loss, whether you were covered for it or not, this may sound like a pretty scary - or a pretty foolish idea. It doesn't have to be.
We all self-insure against certain risks every day. Most people don't carry health insurance for their pets. Veterinary care is more affordable than medical care for people, and with some planning, we pet owners can usually save a little each month to anticipate pet-care costs. The federal government doesn't usually carry auto insurance on the cars that it owns because its financial resources are enough to cover the kinds of losses incurred even in a very expensive car accident. No one buys insurance to offset the loss of income they expect to suffer if Martians come and stain all of their neckties.
Some losses, like necktie-staining Martians, are too unlikely to insure against. Some few entities, like the federal government, have the resources to self-insure against even profound losses. Some risks, like the cost of our pets' health, are predictable enough that the insurance products currently available to insure against loss are poor investments.
There are some times when it's best to accept the risk of financial loss for yourself.
There are other times when it's not the best - or when it's impossible.
Your family depends on you. If you died today, who would pay for your funeral? Who would pay for your relatives to come say their farewells? Who would pay your mortgage?
You're a good driver. If you were hit by a driver who isn't - if you were hit by a driver without enough insurance to cover your losses, could you cover those losses yourself?
If a fire destroyed your home, or an identity thief forced you to rebuild your credit and finances, or if a door-to-door solicitor slipped on your sidewalk and sued you, what would you do? How much loss can you tolerate? Who's there to help?
Self-insurance isn't always a bad thing - it's just a fact.
It is important, though, to know what you're self-insuring and what you're protected against, and it's important that you're comfortable with your risk.
Call your insurance agent today and find out what risk you're self-insuring, and what risk you're sharing.
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