When it makes sense to self-insure

by Nikki Mandow / 07 August, 2018

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In some circumstances, for some people, providing your own insurance makes more sense than paying insurance premiums.

Insurance premiums can add up: house, car, health, disability, life and more. And if you never claim, it’s all money down the drain. There is another option – self-insuring. But you want to be careful.

Self-insuring means putting aside a sum of money to cover expenses you might incur if the unexpected happens – injury, loss, house being knocked down by an earthquake, etc.

If it happens, you spend the saved sum. If it doesn’t, you get to keep the money you would have paid in insurance premiums.

Self-insurance works better in some situations than others.

Health insurance

Many financial advisers suggest having three months of expenses in an easily accessible emergency fund. You might need a bit more if you are thinking of handling health costs too. The sorted.co.nz personal finance website suggests self-insuring may only be an option for cheaper procedures – say up to $20,000. Or you could cut your premiums by setting aside a buffer and opting for a higher excess.

House insurance

Self-insurance is probably not going to work on this one. If you have a mortgage, you’ll be expected to have insurance. And you’d need one heck of a buffer to pay to rebuild your house in the present market.

Car insurance

Self-insurance might work if your car isn’t too expensive. But remember, if you crunch someone else’s $300,000 BMW and it’s your fault, they will be after you to pay.

Life insurance

Self-insuring for life insurance is best done if you are debt-free, have no dependants or have large amounts of savings. But then you might not need life insurance at all. As a rule of thumb, the moneyhub.co.nz website works on a ballpark insured figure of 10 times the annual salary of the highest earner in the family. For example, if you earn $60,000 per year, insure for $600,000. You might get that down to 3-4 times if you’re frugal. But putting $100,000 in a bank account isn’t going to cut it if you die leaving three children.

This article was first published in the July 14, 2018 issue of the New Zealand Listener.

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