Insurance Read Time: 4 min

When to Self-Insure

One reality of life is that risk is ever present. It exists in our commute to work, in our investment choices, and in our lifestyle decisions. Some risks can be transferred to an insurance company (e.g. auto or homeowners), while others we assume ourselves.

When you choose to bear the financial burden of an adverse event, you are engaging in self-insurance.1

You may self-insure by assuming the entirety of a financial risk, or a portion of it. For example, the deductibles you have on your insurance policies are an expression of the portion of financial risk you are willing to assume.

If you want to self-insure, you should consider two action steps.

The first is to attempt to manage risks, such as installing a home alarm or not texting and driving.

The second step is to create a cash reserve to have available for expenses that are associated with any losses you may suffer.

If you choose to self-insure, here are some tips that might help you manage the costs:

  • The deductible you choose is one of the major factors in pricing an insurance policy. Generally, the higher the deductible, the lower the cost of the insurance.
  • You can choose to selectively assume all the risk. For instance, do you really need to purchase extended warranties? Does your 14-year-old car need collision coverage?
  • Consider lengthening the waiting period before payments begin on disability insurance. By choosing to wait, for example 90 days before beginning benefit payments rather than 30 days, you are self-insuring the 60-day difference, which potentially can reduce the cost of a policy.2

The reserve fund you may create to pay for potential financial losses should be kept in highly liquid assets, such as money market mutual funds.³

Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

Ultimately, the decision to self-insure—and to what degree—will be a function of how much risk you can afford to take on.

1. Self-insuring is an insurance strategy based on certain assumptions. It is not intended to provide specific insurance advice. Keep in mind that the types of insurance examples and approaches illustrated may not be suitable for everyone. A financial professional can help with a risk evaluation.
2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Federal and state laws and regulations are subject to change, which may have an impact on after-tax investment returns. Please consult legal or tax professionals for specific information regarding your individual situation.
3. Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

Should You Ever Retire?

Should You Ever Retire?

A growing number of Americans are pushing back the age at which they plan to retire. Or deciding not to retire at all.

Financial Hacks for Millennials: Student-Debt

Financial Hacks for Millennials: Student-Debt

Here are seven ways to reduce that debt and live more confidently.

Infographic: Whole Life Insurance Can Be an Essential Piece

Infographic: Whole Life Insurance Can Be an Essential Piece

You buy whole life insurance as protection for your loved ones and your legacy. But it can be so much more.

 

Have A Question About This Topic?







Thank you! Oops!

Disability Protection for Your Employees and Your Business

Many business owners are surprised to learn that wages paid to a disabled employee, not subject to a written plan, are not tax-deductible business expenses.

How Retirement Spending Changes With Time

It can be difficult for clients to imagine how much they’ll spend in retirement. This short, insightful article is useful for jumpstarting a conversation about retirement spending, spending habits, and potential medical costs.

Budgeting After a Divorce

Divorce is the second most stressful time in a person's life. Here's some tips to get through it.

View all articles

What Is My Risk Tolerance?

This questionnaire will help determine your tolerance for investment risk.

Historical Inflation

This calculator shows how inflation over the years has impacted purchasing power.

Tax Freedom Day

Assess how many days you'll work to pay your federal tax liability.

View all calculators

5 Smart Investing Strategies

There are some smart strategies that may help you pursue your investment objectives

Managing Your Lifestyle

Using smart management to get more of what you want and free up assets to invest.

Principles of Preserving Wealth

How federal estate taxes work, plus estate management documents and tactics.

View all presentations

The Fed and How It Got That Way

Here is a quick history of the Federal Reserve and an overview of what it does.

Investments

You’ve made investments your whole life. Work with us to help make the most of them.

The Cycle of Investing

Understanding the cycle of investing may help you avoid easy pitfalls.

View all videos