How To Cut Costs by Self Insuring

Insurance is a mechanism of providing protection against a possible eventuality--death, illness, possible interruption in employment or business, health and medical contingencies--arising on a day to day basis or under special circumstances such as while traveling and so on. 

Now, there is a certain cost to obtaining insurance, which is paid in the form of insurance premiums.  Insurance companies calculate premiums by taking into account various inputs and finally arriving at a cost for insuring your family, your belongings and you.  Of course, based on market conditions and the level of risk assumed in your particular case, this cost of insurance could vary from being a nominal amount to consuming a large percentage of your budget.

In such circumstances, is there a less expensive option for insurance?  Can an individual or a business plan its finances in such a way that it provides for its own contingencies, thereby avoiding extra costs for insurance?  Yes, indeed there is a way and it is called self-insurance.

Simply put, self-insurance can be assured by the creation of a cash reserve fund to pay for exigencies.  Therefore, self-insurance planning calls for very astute thinking and planning, since you will be allocating cash for reserves, taking it away from investment in business and risking a loss of investment revenues. 

Next, examine all your insurance requirements - be it for your person, your vehicles, property, business and so on.  Examine the warranties and extended service contracts and any annual maintenance contracts that you have going.  It is quite possible that the cost of these contracts for warranty and maintenance quite near half of the asset value.  Now, if you are a careful owner, having used your asset diligently, it is highly unlikely that you will suffer damage and thereby need to cash in on the warranty or call in for the maintenance contract.  If your prudent thinking suggests these probabilities as rare, then avoid incurring the extra expense.  After all, these payments are one form of insurance against the need to incur payments for repair and maintenance unexpectedly.

Another form of self-insurance could also be to limit your risks and proportionately reduce the insurance cover.  For example, if you have a large bouquet medical policy covering a range of exigencies, check to examine if all the cost-points mentioned there would be applicable to you.  Likewise, with property insurance, it would not make sense to have a cost component for flooding if your house is situated on a hill.  Evaluate all your existing insurance policies and eliminate unnecessary coverage.

Please note that not for a minute am I suggesting taking the risk of not insuring at all; it is vitally important to keep your family, belongings, business assets and yourself insured, as well as to keep in place all those insurances that are mandated by law.  In the days of astute financial management and costly insurance coverages provided by large insurance companies, self-insurance could be a smart method of achieving the purpose at a less-significant cost.


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