Self-insurance involves setting aside your own money to pay for a possible loss instead of purchasing insurance and expecting an insurance company to reimburse you. With self-insurance, you pay for a cost such as a medical procedure, water damage, theft, or a fender bender out of your own pocket rather than filing a claim under your policy with an insurance company.
BREAKING DOWN Self-Insurance
Insurance is designed to protect against financial losses you can’t afford to bear, but for losses that you can afford, self-insurance can save money since you aren’t paying insurance premiums. When considering self-insurance, you’re weighing the certainty of spending money on premiums against the possibility of incurring a loss that you won’t be able to turn to insurance to pay for.
You probably already self-insure for certain items without even realizing it. When you choose your deductible on an insurance policy, you’re basically self-insuring for the amount of the deductible. You’re choosing an amount of risk you’re comfortable paying for out of pockets, such as $1,000 or $5,000. Another area where people frequently self-insure is when they reject extended warranties. While a warranty is not technically insurance, it is similar in that it covers the cost of an adverse event. However, because most people can afford to replace or repair items like televisions and computers, they forego extended warranties and self-insure instead.
For very expensive risks, self-insurance only makes sense if you’re wealthy. For example, few people choose to self-insure their homes. For one, if you have a mortgage, your lender will require you to carry homeowners insurance. But even if your house is paid off, you probably don’t want the risk of having to pay out of pocket to completely rebuild it if it burns to the ground. If your net worth is high relative to the value of your house and you aren’t terribly risk-averse, however, it might make more sense to forego purchasing insurance, save the few hundred dollars it would cost you every year, and keep money set aside in the unlikely event that you need to rebuild.
If you’re going to self-insure, it is important to have an accurate understanding of the worst-case scenario so you’re prepared financially. As an alternative, if the risk is too high, you might consider maintaining insurance but with a very high deductible.
Self-Insurance and Health Insurance in the United States
In the United States, self-insurance applies especially to health insurance and may involve, for example, an employer providing certain benefits – like health benefits or disability benefits – to employees and funding claims from a specified pool of assets rather than through an insurance company. In self-funded health care, the employer ultimately retains the full risk of paying claims, whereas when using insurance, all risk is transferred to the insurer.
–Julia Kagan Investopedia