When I was in my early twenties, newly married and starting out, there were not the insurance options that there are today. You were expected to insure your car, your home if you owned one, life insurance if you had a family, and to have health coverage, but that was it. These days there are so many kinds of insurance. You can choose to insure your travel, your pet, your wedding, and your purchase of almost any size. Are these new insurance options good things?
Before all these insurance options were available people had to go unprotected—or did they? What we did was ENsure that we had money saved in the form of an Emergency Fund or Nest Egg that would protect us against any financial hardship caused by the accidental, but inevitable, smaller losses that are part of everyday life.
In today’s world this approach is as valuable as it was then. I call it Self-Insurance. Whenever the amount at risk is something you can cover, be your own insurance company. For example, think of all of the extended warranty policies covering repairs not covered by the original warranty. The odds are in your favor if you opt to skip the insurance and just cover the expense yourself if something happens.
The same general principal applies to the insurance policies you do need such as your auto and home policies. Self-Insure for as much as you can afford, as the savings are considerable. If your auto insurance deductible is $250 or $500, raising it to $1,000 or $1500 can save between 25 and 40 percent on your premium. For homeowners insurance, a similar move can save you in the neighborhood of $200 a year.
Rather than pay others to cover you against the various setbacks that are bound to arise at some point, Self-Insure by setting aside enough money to cover such a potential loss yourself. Insurance companies include four costs in their pricing: expected claims payments, commissions (often very big), company overhead, and company profit. When you Self-Insure and something does go wrong, you still get to pocket all but the cost of the actual claim amount. Plus, by approaching insurance this way you will not waste money on any of the purchases that go well and do NOT break. Yet, you will always be prepared for the times when you need to ‘pay a claim’.
Add the money you might have spent here and there on insurance to your Emergency Fund, if it’s not already at least 4-6 months expenses. If it is, you just found some extra money. If you’d like some more advice on saving for your Emergency Fund, see Prioritizing Your Savings.
So, take the maximum deductible you can afford on insurance you actually do need, but say no to extended warranties and odd-ball insurance plans in favor of Self-Insurance. You’ll save a surprising amount of money in the long run this way.