Self-Insured vs. Fully Insured: What Is Self Insuring?

The Big Picture on Going Self-Insured vs Fully Insured:

• • Self-insurance allows individuals to set aside funds for any emergency, offering flexibility that specific insurance policies do not.
  • By self-insuring, individuals can potentially save more money compared to paying premiums for fully insured plans, especially if the invested funds grow over time.
  • Fully insured plans can sometimes fail to pay out due to loopholes or exclusions, whereas self-insurance relies on disciplined savings and investment strategies to cover potential risks.

Companies want to sell you insurance for every possible risk in life.

Why? Because they make such high profit margins on it.

Which is precisely why I self-insure against financial risk whenever possible. Even so, you really do need some types of insurance coverage, even while you can skip other costly policies.

Here’s how to decide which policies you can skip and which you truly need.

Self-Insured vs Fully Insured

When you’re fully insured, you have a third party covering your risks in exchange for a monthly premium.

When you self-insure, you set aside enough funds to cover against a given type of risk. 

So, rather than buying a fully insured plan to protect against a risk, you save or invest your own money. If the worst happens, you tap into those savings rather than filing a claim with an insurance company.

An emergency fund is a common form of self-insuring. It protects you against unexpected bills such as home repairs, car repairs, and job loss.

This raises an important point: self-insuring lets you use your reserve for any emergency or cost, not just a specific type. When you buy an insurance policy, it only protects you against a few specific risks. Self-insuring leaves you the flexibility to use the money for whatever you need.

Differences Between Being Self-Insured vs Fully Insured

Self insurance and full insurance are different in these aspects:

Example of Self-Insurance

Imagine you’re a single 55-year-old woman considering long-term care insurance. According to a survey by the American Association for Long-Term Care Insurance (AALTCI), the average annual premium is $2,675 (around $223/month).

Of course, you could buy coverage to protect against the risk of needing to pay for nursing care later in life. Or you could self-insure and invest that money each month.

If you start investing $223 monthly in a real estate crowdfunding platform like Fundrise or Groundfloor, you’ll have $228,583 by turning 80. At a 9% return—a reasonable average for Fundrise and Groundfloor—you’d have $223,583.

When you reach 80, you start needing a home health aide to come every day to care for you. According to Genworth, the average monthly cost for a home health aide is $4,576. You live another four years before shuffling off this mortal coil and still come out around $10,000 ahead.

Or you don’t need care at all, and you die at 84 with an extra $334,900 (higher due to the extra four years of compounding). You pass that along to your children in your will.

Or you live until 84, have an extra $334,900, and need four years of care. You die with an extra $115,252.

Or you start needing care at age 80 and live for another five years instead of four. In that case, you need to tap into your retirement savings to cover the shortfall of $45,977.

The Hidden Risk of Full Insurance Policies

As outlined above in the example of self-insured vs. fully insured, self-insurance does come with some risk. In most scenarios, you come out far ahead by self-insuring. But in the worst-case scenarios, you probably would have been better off buying an insurance policy.

Still, that hinges on a key assumption: that your insurance policy will actually pay you.

I can’t tell you how many times I’ve seen insurance carriers find some loophole to avoid paying even when they should have. They could have added exclusions to your policy or written the legal language in a way that leaves them plenty of loopholes, or they simply don’t pay on the assumption that you can’t afford to hire good attorneys to sue them and win.

I fully admit it: I’m insurance-skeptical. I have zero confidence in insurance corporations to have my back when I need them most. They love to promise the stars when they want you to open your wallet and buy a policy but aren’t so quick to open their wallet when you have a claim.

Buyer beware.

Types of Insurance You Can Self-Fund

Some types of insurance lend themselves well to self-insuring rather than buying full coverage. Others, you really do need full insurance protection—more on them later.

For the following insurance types, consider self-insuring.

Life Insurance

As someone pursuing financial independence and early retirement, my wife and I mostly live on her modest salary and save and invest my income. That kind of high savings rate comes with some huge hidden benefits.

To begin with, we don’t need life insurance. If one of us kicked the bucket prematurely, the other could continue living and raising our daughter on a single income.

Life insurance is a relic from the era of a single breadwinner. If your household relies on one breadwinner — or both spouses working — and an earner dies, the surviving family members are in trouble.

But you don’t need life insurance if your household can continue paying its bills even if one partner passes.

Long-Term Disability Insurance

For the same reason, my family doesn’t buy long-term disability insurance. Losing one of our incomes wouldn’t cripple us financially.

This means we can take the money we would have spent on life insurance and disability insurance premiums and invest it. It can compound and build wealth for you in the background, untouched until you need to tap into it.

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Long-Term Care Insurance

As outlined in the self-insuring example above, you can funnel money into investments rather than paying the annual costs for long-term care insurance. If you eventually need care, you can tap into those investments to cover the cost.

Electronics Warranties & Insurance

Imagine a company asking you if you want to insure your mobile phone for $15/month, with a $200 deductible. Rather than pay them that money, you invest $200 and set up automated monthly investments of $15. 

In all likelihood, nothing happens—you don’t drop your phone in a toilet or run over it with your car. After three years, you’d have around $850 in your portfolio, assuming a 9% return. You could use that to buy a new phone or let it keep compounding.

If you do break your phone, you can tap your invested savings. It may not be enough to buy an expensive flagship phone, but that’s the risk you run and the price you pay for breaking your phone.

Health Insurance Coupled with an HSA

A health savings account or HSA offers a type of self-insurance. You use it to save money like a checking account or invest money like a brokerage account, and then use the funds to cover healthcare costs before reaching your annual deductible.

This raises a crucial point: You still need a health insurance policy. But if you don’t get health benefits through your employer, you can buy a low-cost, high-deductible health insurance policy rather than an outlandishly expensive one.

I particularly love the tax benefits of HSAs, the best of any tax-sheltered account. Not only can you deduct contributions, but the money grows and compounds tax-free, and you pay no taxes on withdrawals for qualified medical expenses.

In fact, the combination of a high-deductible health plan and an HSA provides excellent health coverage for early retirees.

Home Warranties

Home warranties come with the same fundamental problem as other types of insurance: the math is in the corporation’s favor.

They hire armies of actuaries to run detailed statistical and probabilistic analyses on the odds of actually having to pay out. Then, they make sure they charge enough to earn a huge profit margin even after those payouts.

When you buy a home warranty, the insurer knows that the odds of you filing a claim on new appliances and other home parts are low. So, it’s an easy way for them to earn some extra money from new home buyers.

Just set aside some extra savings as an emergency fund in case something does break at your property.

Travel Insurance

Another ripoff is when travel companies, from airlines to third parties like Expedia and Travelocity, try to upsell you on buying travel insurance.

If you know you need extra flexibility and might need to change your travel plans, go ahead and buy it. Otherwise, pad your emergency fund.

Insurance Policies You Do Usually Need

Much as I distrust insurance companies, I also acknowledge that you need protection against certain freak circumstances and risks.

Don’t skimp on the following types of insurance.

Health Insurance

Everyone needs health insurance.

Yes, you can partially self-insure with an HSA. However, it would be best if you still coupled your HSA with medical insurance.

The risk of a major health catastrophe in any given year is relatively low. But over your lifetime, you will almost certainly experience a major health crisis, possibly several. It’s not matter if you’ll have a significant health challenge, but when.

And the older you get, the greater the odds of it happening sooner rather than later.

Auto Insurance

If you own a car, you need auto insurance.

I don’t own a car; I walk, bike, or Uber everywhere. So I don’t have car insurance, but when I did, I had not only liability coverage (for the other person’s car) but also collision coverage (for my car).

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Homeowners Insurance & Flood Insurance

If you have a mortgage, your lender requires you to have homeowners insurance.

It covers risks like fire and storm damage, and sometimes others as well. I’ve experienced fire damage as both a homeowner and a landlord—it happens more often than you think.

So, buy a homeowners policy even if you don’t have a mortgage.

If you live in a flood plain, you only need flood insurance, which your lender will double-check before signing off on your loan. But even if you buy your home in cash, double check if it’s in a flood plain, and buy coverage if so.

Landlord Insurance: Both Property & Rent Default

Likewise, you need landlord insurance to protect against property damage if you have a rental property mortgage. And if your policy lapses, your lender will buy a policy and charge you for it.

Note that landlord insurance covers the building but not the belongings inside. The tenant’s renter’s insurance policy covers their personal property if they have it (and you should require them to buy it as a lease clause). Check out Sure for competitive rates on landlord insurance.

However, landlords should also consider other types of insurance coverage. Rent default insurance only costs a few hundred dollars annually and pays you rent if your tenant stops paying it. You keep collecting rent until you complete the eviction process and sign a lease contract with a new tenant.

I’ve filed claims on these policies and had no problems collecting rent from the insurance company.

Considerations Before Choosing Between Going Self-Insured vs Fully Insured

Every situation is unique, and if you prefer to customize your insurance setup according to your preference, here are some key things you need to consider beforehand: 

• • Predictability: Full insurance allows for better predictability, as you only need to worry about premiums. Not so with self-insurance. 
  • Discipline: Self-insurance requires you to manage your emergency savings. This requires discipline, will, and a lot of practice. 
  • Potential investment boost: As mentioned in the article, self-insurance allows you more flexibility with your money, up to and including earning more through high-yield investments. However, your investments may be negatively affected if the expenses exceed your savings. 
  • Tax benefits: Some full insurance plans may offer subtle tax advantages. For example, premiums and flexible savings account (FSA) payments can reduce taxable income (though, I must admit, those are often negligible). Meanwhile, using self-insurance and high-deductible health plans (HDHPs) may offer even better tax advantages through health savings accounts. 

Bottom Line: Being Self-Insured vs. Fully Insured

It would be best to buy a few types of insurance, but in most cases, self-insuring makes more sense.

Insurance companies know the math. They know that they’ll collect far more from their average customer than they’ll pay out—that is when they bother to pay out at all rather than finding a loophole to avoid it.

That said, self-insuring requires discipline. You have to set aside money each month for your emergency fund, your investments, and your self-insurance. Most Americans would rather spend every penny they earn on new clothes, gadgets, and trendy restaurants.

Self-insurance is a hidden benefit of the FIRE lifestyle, a perk of a high savings rate. The more of your income you save and invest, the less insurance you need to buy. Which, in turn, lets you save and invest more money in a virtuous cycle.

When you retire at 40, you don’t need life insurance, long-term disability insurance, or many other types. I’ll keep that money in my portfolio, thank you very much.♦

What is self-insuring in your own personal finances? What questions do you have about being fully insured vs. self-insurance?

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