What Should You Know About Self- Insurance?
In this post, we tackle the idea of self-insurance and how it fits into a comprehensive insurance plan.
We take great pride in the advisory aspect of our business – helping our clients to plan for all of the nasty little surprises that life can sometimes throw at us all. We walk our clients through a systematic approach to risk management, helping them to imagine the different kinds of loss they could face and then plan in advance to meet those losses.
Following this kind of systematic approach to risk management, clients can have comfort that even in the worst situations, they will be as well off as could be hoped under the circumstances. What we always say is that if you have a problem that can be solved with money, things could always be worse.
Many of the trials we face in life cannot be solved only with money, unfortunately. Family illnesses and injuries, loss of irreplaceable family heirlooms – these are the kinds of things that simply cannot be solved with money. In every other case, having appropriate reserves of money available at times of loss and family stress is invaluable.
And even in the worst situations, having the necessary financial wherewithal to handle expenses frees up all the family members to focus on each other and face the challenge without worrying about money as well.
“Self-insurance” is a pretty simple concept – it really just means that instead of taking out a policy of insurance and making regular payments of a fairly modest size for the insurance premium, you just put aside in savings an amount of cash – usually fairly significant — required to meet the anticipated loss in that category of risk.
High Net Worth Individuals, Self-Insurance & Ownership Structuring
For our high net worth clients, in certain risk situations and with respect to certain insurance products, it just makes sense to self-insure. We very frequently work as an integral part of advisory teams that include the family lawyer, accountant and financial advisor.
We look at specific categories of risk – like automobile liability, homeowners insurance, business & commercial lines and all the others – and then we “run the numbers” to see how much the insurance would cost versus the financial consequences of setting aside the requisite amount of money to cover the loss. Sometimes we see cases where self-insurance makes good financial sense and we advise our clients accordingly.
Our goal is to assist clients with wise financial planning with respect to insurance – not just to sell more insurance. Everybody needs insurance in different lines and we know that if we focus on building lifelong relationships through giving sound advice, we will maximize our business over the long-run.
The ability to save money in your risk management plan by using self-insurance very frequently depends on structuring the ownership of assets through the use of various legal entities. This kind of planning is in the realm of the lawyers but we have deep familiarity with using insurance products in the context of structured ownership to maximize the efficiency of your risk management program.
Self-Insurance for Regular Folks
Everybody self-insures some of the time – you just can’t avoid it. You don’t think so? You’ve got insurance policies to cover every possible category of loss? If you check the policies carefully – and our clients always do (we walk them through everything, step by step) – you will see that just about every policy you hold will have a co-payment, a deductible, a coverage limit.
The losses you could face in these areas are in the nature of an unavoidable self-insurance. This is a vital concept to understand and plan for – especially if you are on a very tight budget or even “living paycheck to paycheck.”
If you have a $500 deductible on your automobile collision insurance, then that means that you must come up with the first $500 to get your car repaired if you have an accident.
If you do not have that $500 safely set aside and if you are not in a situation where you can reasonably absorb that kind of cost within your general disposable income, then what happens if you have an accident that leaves your car inoperable? You could just not use the car until you are able to save up the $500, but what if – like most of us – you need your car to get to work and earn money?
Just going through these questions shows you how a failure to plan ahead can lead to a cascade of troubles that could turn a fairly minor car accident into a serious financial life crisis that could threaten your transportation, your employment and even your residence.
The time to think about self-insurance in the automobile context is before you buy a car! When you are thinking about the full, true cost of ownership of any particular vehicle, you must include in your calculations the cost of insurance and self-insurance.
If you are unable to put together the down payment required for the automobile loan and set aside in savings an amount equal to the deductible on your collision policy, then you are trying to buy more car than you can afford!
One concept of risk management that we always stress to our clients is that you need to plan so that various mile-markers of success that you achieve in life – your prestigious car, prestigious house, etc. – can be maintained into the indefinite future. It doesn’t do you too much good to buy a certain car or house if the property is subject to loss because you didn’t plan properly.
You are much better off living more modestly with a proper risk management plan than you are having a lifestyle that appears affluent but is founded on quicksand because it is not protected.
As in so many other areas of the insurance business, some people get a little nervous in thinking about risk management and self-insurance. This causes some people simply to bury their heads in the sand and neglect planning completely.
This – as you know – can lead to disaster! Don’t let this happen to you. We can take your anxiety away through our systematic, knowledgeable program. Once we help you make a sound plan, you will know you are covered and you’ll sleep better at night. Come see us and we’ll get you started on the right path.