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When it makes sense to self-insure

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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.

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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.