Learn what self-insurance really means, when it makes financial sense, and when it’s a dangerous gamble. Understand the math, risks, and strategic alternatives to going without insurance in 2026.

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The $847,000 Gamble That Destroyed Everything They Built

Michael and Jennifer considered themselves financially savvy. They’d built a successful small business, accumulated $180,000 in savings, owned their home outright, and had no debt. When they calculated their annual insurance costs—$18,000 for health insurance, $2,400 for homeowners, $1,800 for auto, $600 for life—they made what seemed like a rational decision.

“We’re essentially paying $22,800 a year to insurance companies,” Michael reasoned. “That’s money we could invest. We have savings to cover emergencies. We’re healthy, careful, and our home is well-maintained. We’ll self-insure.”

They canceled their health insurance, kept minimum liability auto coverage as required by law, and dropped their homeowners policy since the mortgage was paid off.

For three years, the strategy seemed brilliant. They saved $68,400 on premiums and watched their investment account grow. They congratulated themselves on beating the insurance industry’s “fear-based marketing.”

Then Jennifer developed stage 3 breast cancer.

The oncology bills started arriving: chemotherapy treatments at $12,000 per session, radiation therapy, surgical procedures, genetic testing, follow-up care. Within six months, medical expenses exceeded $400,000. Their savings evaporated. They refinanced their paid-off home to cover costs. The business suffered as Jennifer couldn’t work and Michael spent time managing her care instead of running operations.

Two years after diagnosis, total costs approached $847,000:

• Medical treatment: $623,000
• Lost business income: $178,000
• Home equity loan payments and interest: $46,000

Their choice to self-insure didn’t just cost them their savings—it cost them their home (eventually foreclosed), their business (forced to sell at fire-sale prices), and years of financial stress during Jennifer’s recovery.

“We thought we were being smart,” Michael reflected. “We didn’t understand that self-insurance only works when you can actually afford the worst-case scenario, not just the average scenario.”

This story illustrates the critical distinction many people miss: self-insurance isn’t the same as going without insurance. True self-insurance requires having financial resources sufficient to absorb catastrophic losses without destroying your financial life. For most people, “self-insuring” really means “gambling unprotected.”

This comprehensive guide explains what self-insurance actually means, when it’s a prudent financial strategy versus dangerous exposure, how to calculate whether you can truly afford to self-insure, and smart alternatives that provide protection while reducing insurance costs.

What Self-Insurance Actually Means: Beyond the Common Misconception

The term “self-insurance” is widely misunderstood. Let’s establish a clear, accurate definition.

The True Definition of Self-Insurance

Self-insurance is a deliberate risk management strategy where you assume financial responsibility for potential losses by maintaining sufficient liquid assets to cover worst-case scenarios, rather than transferring that risk to an insurance company through premium payments.

Key components of genuine self-insurance:

1. Deliberate decision based on financial analysis Not an accidental gap in coverage or inability to afford insurance, but a conscious choice supported by calculations
2. Sufficient liquid reserves Cash or easily accessible investments equal to or exceeding potential maximum losses
3. Financial ability to absorb total loss Losing the reserved funds would not trigger bankruptcy, home loss, or financial devastation
4. Ongoing funding mechanism Continued contributions to reserves replacing the premium payments you would have made

What Self-Insurance Is NOT

Self-insurance does NOT mean:

❌ Simply not buying insurance because you can’t afford it ❌ Hoping nothing bad happens ❌ Planning to “figure it out” if disaster strikes ❌ Relying on credit cards, loans, or family help in emergencies ❌ Having some savings but not enough to cover catastrophic losses ❌ Accepting financial ruin as an acceptable risk

Self-Insurance vs. Being Uninsured

True self-insurance:

• $250,000 home, $300,000 in liquid reserves
• Homeowners insurance costs $2,000 annually
• Decision: Keep reserves accessible, invest premium savings
• If house burns down: Rebuild using reserves ($250,000), reserves still adequate after loss ($50,000 remaining)
• Result: Financial security maintained

Being uninsured (falsely called “self-insurance”):

• $250,000 home, $25,000 in savings
• Homeowners insurance costs $2,000 annually
• Decision: “Can’t afford” insurance, use savings for other purposes
• If house burns down: Total financial devastation, likely bankruptcy
• Result: Financial ruin

The distinction is critical. One is a legitimate financial strategy. The other is financial Russian roulette.

The Mathematics of Self-Insurance: Can You Actually Afford It?

Determining whether you can genuinely self-insure requires calculating the financial resources needed to absorb maximum potential losses.

The Self-Insurance Sufficiency Formula

Required reserves = (Maximum potential loss + Recovery costs + Income replacement) × Safety margin

Let’s apply this to different insurance types:

Health Insurance Self-Insurance Calculation

Potential maximum loss:

• Catastrophic illness (cancer, heart disease, stroke): $500,000 – $2,000,000
• Major accident with long-term disability: $300,000 – $1,500,000
• Routine serious condition (diabetes, autoimmune disease): $100,000 – $500,000 annually
• Pregnancy complications: $50,000 – $300,000

Required reserves for health self-insurance:

• Minimum: $1,000,000 in liquid assets
• Comfortable: $2,000,000 – $3,000,000
• With ongoing income replacement needs: Add 3-5 years of salary

Reality check: Annual health insurance premium for family: $15,000 – $24,000 Years to accumulate $1,000,000 by investing premiums at 7% return: 27+ years

Conclusion: For 99.5% of people, health insurance self-insurance is mathematically impossible

Homeowners Insurance Self-Insurance Calculation

Potential maximum loss:

• Full home replacement: $200,000 – $800,000 depending on location and size
• Plus: Contents replacement ($50,000 – $150,000)
• Plus: Additional living expenses during rebuild ($30,000 – $60,000)
• Plus: Liability lawsuit from injury on property ($100,000 – $5,000,000)

Required reserves for homeowners self-insurance:

• Home value: $300,000
• Contents: $100,000
• Liability buffer: $500,000
• Total minimum reserves: $900,000

Reality check: Annual homeowners premium: $1,800 Net worth after home equity: Must exceed $900,000 in liquid assets

Who can actually self-insure homeowners:

• Someone with $300,000 home and $1,200,000 in liquid investments
• Someone with $500,000 home and $2,000,000 in liquid investments

Who cannot self-insure:

• Anyone whose net worth equals roughly the home value (most homeowners)
• Anyone without substantial liquid assets beyond home equity

Auto Insurance Self-Insurance Calculation (Liability Only)

Potential maximum loss:

• Serious injury accident: $500,000 – $5,000,000 in lawsuit damages
• Multiple victim accident: $1,000,000 – $10,000,000+
• Permanent disability/death: Millions in lifetime medical costs and damages

Required reserves for auto liability self-insurance:

• Minimum: $1,000,000 liquid assets
• Comfortable: $3,000,000 – $5,000,000+

Legal consideration: Only New Hampshire and Virginia allow liability self-insurance, and Virginia requires:

• $500,000+ in liquid assets
• Formal application and bonding

Reality: Auto liability self-insurance is illegal in 48 states and financially dangerous even where legal

Life Insurance Self-Insurance Calculation

Potential loss to family:

• Income replacement (10-15 years): $500,000 – $2,000,000+
• Mortgage payoff: $150,000 – $400,000
• Children’s education: $100,000 – $400,000
• Final expenses: $15,000 – $30,000
• Debt elimination: Variable

Required reserves for life insurance self-insurance:

• Family with children, $75,000 income, $250,000 mortgage: $1,200,000 minimum
• Family with children, $100,000 income, $350,000 mortgage: $1,750,000 minimum

Reality check: $500,000 term life insurance cost for healthy 35-year-old: $400 – $600 annually Accumulating $1,200,000 to self-insure instead: Requires decades

Who can self-insure life insurance:

• Wealthy individuals with estates exceeding $3,000,000 – $5,000,000+
• Single people with no dependents or debts
• Retired individuals with sufficient assets to support surviving spouse

The Risks of Self-Insurance: What You’re Really Gambling

Choosing to self-insure (or being uninsured while calling it self-insurance) exposes you to specific, quantifiable risks.

Risk 1: Catastrophic Loss Exceeding Reserves

The scenario: You self-insure with $200,000 in savings, believing it’s adequate. A serious illness generates $600,000 in medical bills.

The outcome:

• Savings depleted: $200,000 gone
• Remaining debt: $400,000
• Options: Bankruptcy, debt collection, asset seizure, wage garnishment

Probability: While serious illness is statistically uncommon (affecting ~3-5% of people annually), the consequences are financially terminal when uninsured.

Risk 2: Multiple Simultaneous Losses

The scenario: You self-insure for both health and home. Your house is damaged in a storm ($80,000 repairs) the same year you develop a serious health condition ($120,000 medical costs).

The outcome:

• Total losses: $200,000
• If reserves were $150,000: Completely inadequate
• Must choose which crisis to address, both suffer

Probability: Independent risks can cluster. Medical emergencies often occur during stressful life events (major home damage, job loss, family crises).

Risk 3: Opportunity Cost of Maintaining Large Reserves

The scenario: To truly self-insure health insurance, you keep $1,500,000 in liquid reserves rather than investing long-term.

The opportunity cost:

• Conservative investment return: 7% annually
• Liquid savings return: 2% annually
• Annual opportunity cost: $75,000 in lost investment growth

Over 20 years:

• Lost investment growth: $2,100,000+
• Health insurance premiums for same period: $400,000
• Net cost of self-insurance: $1,700,000 more than buying insurance

Risk 4: Inflation and Rising Costs

The scenario: You calculate you can self-insure health insurance with $500,000 in reserves based on current medical costs.

The reality:

• Medical cost inflation: 5-8% annually (exceeds general inflation)
• In 10 years: Your $500,000 has same purchasing power as $300,000 today
• Your reserves are now inadequate

The problem: Self-insurance reserves must grow faster than the costs they’re protecting against. For healthcare, this is nearly impossible.

Risk 5: Legal and Regulatory Consequences

Auto insurance violations:

• Driving uninsured (48 states): Criminal offense, fines $500-$5,000, license suspension
• At-fault accident while uninsured: Personal liability for all damages, lawsuit vulnerability, potential jail time

Homeowners insurance (mortgaged property):

• Dropping coverage with active mortgage: Loan default, forced-placed insurance at 3-5x normal cost, foreclosure risk

Health insurance (some states):

• Individual mandate violations: State tax penalties $700-$3,800 annually in CA, MA, NJ, RI, DC, VT

Risk 6: Psychological and Stress Costs

The unmeasured burden: Living truly self-insured (with adequate reserves) creates constant anxiety:

• Every health symptom triggers financial concern
• Every weather event threatens home security
• Every car trip involves lawsuit worry

The documented effects:

• Delayed medical care due to cost concerns
• Stress-related health deterioration
• Decision-making impairment
• Relationship strain over money fears

When Self-Insurance Actually Makes Sense: The Rare Legitimate Scenarios

Despite the risks, specific situations exist where self-insurance is financially rational and safe.

Legitimate Self-Insurance Scenario 1: High Net Worth Individuals

Profile:

• Liquid net worth: $5,000,000+
• Annual income: $300,000+
• No debt
• Diversified investments

What they can self-insure:

• Moderate property coverage (they can afford to rebuild)
• Small life insurance needs (estate sufficient for survivors)
• Collision/comprehensive on vehicles

What they should STILL insure:

• Health insurance (medical costs can reach $10M+; even wealthy aren’t immune)
• Liability (lawsuit judgments can target entire net worth)
• Umbrella coverage (protects accumulated assets)

Why it works: Reserves far exceed maximum potential losses. Losing $500,000 to rebuild a home doesn’t materially affect $5,000,000 net worth.

Legitimate Self-Insurance Scenario 2: Specific Low-Value Assets

What to self-insure:

• Vehicles worth less than $3,000-$5,000 (collision/comprehensive, NOT liability)
• Inexpensive electronics and appliances
• Low-value personal property
• Small financial risks under $1,000

Example calculation:

• Vehicle value: $2,500
• Annual collision/comprehensive premium: $600
• Analysis: Paying $600 to insure $2,500 asset is poor value
• Decision: Drop collision/comprehensive, maintain liability
• Self-insurance approach: Set aside $600 in vehicle replacement fund

Why it works: Maximum loss is small, affordable, and non-catastrophic. You could replace the asset from normal cash flow without financial hardship.

Legitimate Self-Insurance Scenario 3: Strategic High Deductibles

Approach: Rather than going completely uninsured, choose very high deductibles and self-insure the deductible amount.

Example:

• Homeowners insurance with $10,000 deductible instead of $1,000
• Premium reduction: $800 annually
• Additional deductible exposure: $9,000
• Requirement: Maintain $10,000 in dedicated emergency fund

Why it works:

• Still protected against catastrophic loss (home replacement)
• Self-insure only the manageable deductible amount
• Premium savings accumulate in emergency fund over time
• Best of both worlds: catastrophic protection + cost savings

Legitimate Self-Insurance Scenario 4: Life Insurance for Certain Individuals

Who can self-insure life insurance:

Single people with no dependents:

• No income to replace
• No one relies on your financial support
• Debts wouldn’t burden family
• Final expenses covered by estate or savings

Wealthy retirees:

• Estate value: $2,000,000+
• Surviving spouse has adequate assets
• No debt
• Children financially independent

Why it works: No financial loss occurs to others when you die. Life insurance’s purpose (income replacement, debt coverage, dependent support) doesn’t apply.

Legitimate Self-Insurance Scenario 5: Short-Term Gaps During Transitions

Acceptable short-term self-insurance:

• One-month gap between jobs when switching employer health insurance
• Brief period between selling one car and buying another (no collision/comprehensive)
• Week or two between moving out of rental and closing on home purchase

Requirements:

• Minimize risk exposure (don’t drive unnecessarily during auto coverage gap)
• Have emergency funds for unexpected costs
• Purchase coverage ASAP, not indefinitely delay
• Understand you’re accepting temporary elevated risk

Smart Alternatives to Self-Insurance: Getting Protection While Reducing Costs

For most people, completely self-insuring is too risky, but insurance costs strain budgets. Strategic alternatives provide protection while managing expenses.

Alternative 1: High-Deductible Plans with Health Savings Accounts

Instead of: Dropping health insurance entirely to “self-insure”

Do this: High-deductible health plan (HDHP) + Health Savings Account (HSA)

How it works:

• Choose HDHP with $3,000-$7,000 deductible
• Lower monthly premiums (save $200-$400/month vs. traditional plan)
• Open HSA, contribute saved premium dollars
• Use HSA funds to pay deductible when needed
• Catastrophic coverage protects against major medical expenses

Example:

• Traditional health plan: $600/month premium, $1,000 deductible
• HDHP: $250/month premium, $5,000 deductible
• Monthly savings: $350
• Annual premium savings: $4,200
• Contribute to HSA: $4,200 annually
• After one year: HSA covers most of deductible
• Catastrophic protection: Maintained throughout

Benefits:

• 40-60% premium reduction
• Tax-advantaged HSA savings (triple tax benefit)
• Catastrophic coverage protects against bankruptcy
• HSA funds roll over year to year
• Can invest HSA funds for growth

Alternative 2: Strategic Coverage Reductions

Instead of: Dropping all coverage to save money

Do this: Reduce coverage strategically on low-value items while maintaining catastrophic protection

Examples:

Auto insurance:

• Keep: Liability coverage at adequate limits ($250,000/$500,000)
• Keep: Uninsured motorist coverage
• Drop: Collision/comprehensive on vehicles worth under $5,000
• Result: 40-50% premium reduction, catastrophic liability protection maintained

Homeowners:

• Keep: Full dwelling coverage
• Keep: Liability coverage ($300,000-$500,000)
• Reduce: Personal property coverage to actual inventory value
• Increase: Deductible from $1,000 to $2,500
• Drop: Small endorsements (jewelry floater for $2,000 necklace)
• Result: 20-30% premium reduction, major risk coverage intact

Alternative 3: Bundling and Aggressive Shopping

Instead of: Self-insuring to avoid high premiums

Do this: Optimize insurance buying to reduce costs 30-50% while maintaining coverage

Tactics:

• Bundle auto + home: Save 15-25%
• Shop 5-7 carriers every 2 years: Save 20-40%
• Maximize all applicable discounts: Save 15-30%
• Maintain continuous coverage (no gaps): Qualify for loyalty discounts
• Improve credit score: Save 25-50% in states allowing credit-based pricing
• Take defensive driving course: Save 5-15%
• Install security systems: Save 10-20% on homeowners

Result:

• Maintain full coverage
• Pay 40-60% less than current premiums
• No self-insurance risk exposure

Alternative 4: Group Insurance Through Associations

Instead of: Going uninsured because individual policies are unaffordable

Do this: Join professional associations, alumni groups, or affinity organizations offering group insurance rates

Options:

• Professional association group health insurance
• Alumni association group life insurance
• Credit union group disability insurance
• AARP (age 50+) group coverage options

Benefits:

• Group rates typically 20-40% lower than individual policies
• Guaranteed issue (no medical underwriting) for some group policies
• Access to coverage that might otherwise be unaffordable

Alternative 5: Term Life Insurance Instead of Self-Insuring

Instead of: “Self-insuring” life insurance with inadequate savings

Do this: Purchase 20-30 year term life insurance

Cost comparison:

• “Self-insurance” goal: Accumulate $1,000,000 for family
• Time required investing $300/month at 7%: 42 years
• Alternative: $1,000,000 term life insurance for healthy 35-year-old
• Cost: $400-$600 annually ($33-$50/month)

Benefit:

• $1,000,000 protection immediate (not in 42 years)
• Pay 83% less than “self-insurance” investment plan
• Can invest remaining savings for retirement instead

Special Considerations: Self-Insurance by Risk Type

Different insurance types have different self-insurance considerations.

Health Insurance: Almost Never Self-Insure

Why health self-insurance fails:

• Medical costs are unlimited (cancer treatment: $500K-$2M+)
• Probability is high (70% of people have major medical event by age 65)
• Inflation outpaces savings (healthcare costs grow 5-8% annually)
• Lack of coverage creates care delays (worsens outcomes, increases costs)

Only legitimate health self-insurance scenario:

• Net worth: $3,000,000-$5,000,000+ liquid assets
• AND willingness to potentially spend $1,000,000+ on medical care
• AND acceptance of financial risk to accumulated wealth

Better alternatives:

• High-deductible health plans ($3,000-$7,500 deductibles)
• Health sharing ministries (limited, religious-based alternatives)
• Short-term health insurance for brief gaps (not comprehensive)
• Medicaid if income-qualified
• ACA marketplace subsidies if income 100-400% of FPL

The math that matters:

• Average person’s lifetime healthcare costs: $400,000-$600,000
• Serious illness adds: $500,000-$2,000,000
• Going uninsured hoping to save $200,000 in premiums over lifetime while risking $2,000,000 in costs is mathematically absurd

Homeowners Insurance: Rarely Self-Insure

When you cannot self-insure:

• Active mortgage (lender requires coverage)
• Net worth less than 3x home value
• Home represents majority of net worth

When you might self-insure:

• Own home outright
• Net worth: $2,000,000+ beyond home equity
• Home value: $300,000 or less
• Have discipline to maintain reserves equal to home value + liability buffer

Better alternative:

• Increase deductible to $5,000-$10,000
• Premium reduction: 25-40%
• Maintain catastrophic fire/liability coverage
• Self-insure only the high deductible amount

Auto Insurance: Liability Never Self-Insure

Cannot self-insure liability in 48 states (illegal)

Can self-insure collision/comprehensive if:

• Vehicle worth less than $5,000
• You have savings to replace vehicle
• You maintain adequate liability coverage ($250,000/$500,000 minimum)

Example decision:

• Vehicle worth: $3,500
• Annual collision/comprehensive: $850
• Math: Paying $850 to insure $3,500 asset doesn’t make sense
• Decision: Drop collision/comprehensive, bank the savings, self-insure vehicle value

Life Insurance: Situational Self-Insurance

Can self-insure life insurance if:

• No dependents rely on your income
• No debts others would inherit
• Estate sufficient to cover final expenses
• Net worth: $1,000,000+ if married (ensures surviving spouse financial security)

Cannot self-insure life insurance if:

• Spouse relies on your income
• Minor children depend on you financially
• Significant debts (mortgage, student loans)
• Estate under $500,000
• Business partners depend on buy-sell agreement funding

The term life insurance advantage: $500,000 term life for healthy 35-year-old costs $400-$600 annually. To self-insure this protection through savings would require decades and hundreds of thousands in investment contributions. Term life insurance is one of the best values in personal finance.

Calculating Your True Self-Insurance Readiness: The Financial Audit

Before considering self-insurance for any risk, conduct this comprehensive financial readiness assessment.

Step 1: Calculate Your Liquid Net Worth

Include:

• Cash in checking/savings accounts
• Money market accounts
• Brokerage accounts (stocks, bonds, mutual funds)
• Accessible CDs (without major penalties)

Exclude:

• Home equity (not liquid)
• Retirement accounts (penalties and taxes make them inappropriate for insurance replacement)
• Business equity (not easily convertible to cash)
• Collectibles, vehicles, personal property (liquidation takes time, value uncertain)

Your liquid net worth: $__________

Step 2: Calculate Maximum Potential Losses for Each Risk

Health insurance maximum loss:

• Catastrophic illness/injury: $1,000,000+
• Required reserves: $1,500,000 minimum

Homeowners insurance maximum loss:

• Home replacement + contents + liability: $__________
• Required reserves: Home value + $500,000 minimum

Auto liability maximum loss:

• Serious accident lawsuit: $1,000,000-$5,000,000
• Required reserves: $1,000,000 minimum (and it’s illegal to self-insure in most states)

Life insurance maximum loss to family:

• Income replacement + debt payoff + education + expenses: $__________
• Required reserves: 10-15x annual income

Step 3: Compare Reserves to Required Amounts

Self-insurance readiness formula:

For each insurance type, calculate: Reserve Ratio = (Liquid Net Worth) ÷ (Required Reserves)

Interpretation:

• Ratio 2.0 or higher: Self-insurance financially viable (you can afford 2x the maximum loss)
• Ratio 1.0-2.0: Self-insurance risky (one loss depletes reserves)
• Ratio below 1.0: Self-insurance financially dangerous (cannot afford maximum loss)

Example:

• Liquid net worth: $800,000
• Homeowners maximum loss: $400,000
• Reserve ratio: 2.0
• Conclusion: Homeowners self-insurance financially viable
• Liquid net worth: $800,000
• Health insurance maximum loss: $1,500,000
• Reserve ratio: 0.53
• Conclusion: Health self-insurance financially dangerous

Step 4: Factor in Income Stability

If you have:

• Stable employment with strong job security
• Multiple income sources
• Profession in high demand
• Geographic mobility for new opportunities

Then: Self-insurance slightly less risky (can replenish reserves after loss)

If you have:

• Unstable employment
• Single income source
• Profession in declining field
• Limited job mobility

Then: Self-insurance much more risky (may not recover from loss)

Step 5: Assess Risk Tolerance

Questions to ask yourself:

1. Could I sleep at night knowing one medical emergency could eliminate my life savings?
2. Am I willing to accept financial ruin as a possible outcome of this decision?
3. Do I have the discipline to maintain reserves and not spend them on other priorities?
4. Can I handle the stress of constant financial vulnerability?

If you answered “no” to any question: Self-insurance is wrong choice regardless of financial calculations

Frequently Asked Questions About Self-Insurance

Is self-insurance the same as not having insurance?

No. True self-insurance means having adequate financial reserves to cover potential losses without financial hardship. “Not having insurance” without sufficient reserves is simply being uninsured and financially exposed, not self-insurance.

How much money do I need to self-insure?

It depends on what you’re self-insuring:

• Health insurance: $1,500,000-$3,000,000 minimum in liquid assets
• Homeowners: Home value + $500,000 for liability
• Life insurance: 10-15x annual income if you have dependents
• Auto collision/comprehensive: Vehicle value + replacement funds

For most people, true self-insurance requires net worth of $2,000,000-$5,000,000+.

Can I legally self-insure my car?

Only in New Hampshire and Virginia. In Virginia, you must prove financial responsibility by depositing $500,000+ with the state. In the other 48 states, liability auto insurance is legally required.

You can drop collision/comprehensive coverage in any state (self-insuring vehicle value), but must maintain liability coverage.

What’s the biggest risk of self-insurance?

Catastrophic loss exceeding your reserves, leading to bankruptcy, debt collection, asset seizure, or financial ruin. Self-insurance works only if you can genuinely afford the worst-case scenario, not just the likely scenario.

How do wealthy people self-insure?

Wealthy individuals with $5,000,000-$10,000,000+ in liquid assets can self-insure some risks because maximum losses represent a small fraction of their net worth. However, even wealthy people typically maintain:

• Health insurance (medical costs can reach $10M+)
• Liability insurance (protect accumulated assets from lawsuits)
• Business insurance (protect income sources)

They may self-insure collision coverage on vehicles or smaller property risks.

Is self-insurance a good way to save money?

For 99% of people, no. The premium savings are overwhelmed by the risk of catastrophic loss. The exception is strategic high deductibles—choosing a $5,000 deductible instead of $500 saves money while maintaining catastrophic protection.

Better money-saving strategies:

• Shop insurance rates every 2 years
• Bundle policies for discounts
• Maximize all applicable discounts
• Choose high deductibles (but maintain coverage)

What happens if I self-insure and can’t pay?

Medical debt: Bankruptcy, asset seizure, wage garnishment, credit destruction, inability to receive ongoing care

Property loss (home): Homelessness, foreclosure (if mortgaged and violated loan terms), years of financial recovery

Liability lawsuit: Bankruptcy, asset seizure, wage garnishment for years/decades, lien on home

Death without life insurance: Family financial hardship, mortgage default, children unable to attend college, surviving spouse forced to work multiple jobs

Can I partially self-insure?

Yes, through high deductibles. Choose policies with $2,500-$10,000 deductibles and maintain emergency funds to cover the deductible. You self-insure the deductible amount while insurance covers catastrophic losses.

This is the smartest approach for most people—reduces premiums 20-40% while maintaining essential protection.

Taking Action: Making Smart Insurance Decisions

Making informed choices about insurance vs. self-insurance protects your financial future.

If you’re considering self-insurance:

Step 1: Run the numbers honestly

• [ ] Calculate your true liquid net worth (excluding home, retirement accounts)
• [ ] Determine maximum potential loss for each risk type
• [ ] Calculate reserve ratios using the formula above
• [ ] Assess whether you meet the financial thresholds

Step 2: Consider alternatives first

• [ ] Get quotes for high-deductible plans
• [ ] Shop rates from 5-7 carriers
• [ ] Calculate bundling discounts
• [ ] Identify coverage you can strategically reduce
• [ ] Estimate total savings from optimization vs. self-insurance

Step 3: Make risk-appropriate decisions

• [ ] Keep health insurance (catastrophic risk too high for 99% of people)
• [ ] Maintain homeowners/renters (asset protection essential)
• [ ] Keep auto liability (legal requirement, lawsuit protection)
• [ ] Evaluate life insurance based on dependents
• [ ] Consider dropping collision/comprehensive on vehicles worth under $5,000

Step 4: Build proper emergency reserves

• [ ] Establish 6-12 month emergency fund
• [ ] Create dedicated reserves for high deductibles
• [ ] Maintain discipline not to spend reserves on non-emergencies
• [ ] Replenish reserves immediately after using them

Step 5: Review decisions annually

• [ ] Reassess financial situation
• [ ] Recalculate reserve ratios
• [ ] Evaluate whether self-insurance is still appropriate
• [ ] Consider purchasing insurance if financial situation deteriorates

The Bottom Line: Self-Insurance as Financial Strategy vs. Financial Gambling

Self-insurance is a legitimate risk management strategy—when you genuinely have the financial resources to absorb maximum potential losses without devastating your financial life. For the vast majority of Americans, this means self-insurance is appropriate only for small, manageable risks like collision coverage on old vehicles or high insurance deductibles, not for catastrophic risks like health, liability, or major property losses.

The critical question isn’t “Can I save money by self-insuring?” It’s “Can I afford the worst-case scenario?” If a $500,000 medical bill, $300,000 home loss, or $1,000,000 lawsuit would destroy your financial future, you cannot afford to self-insure those risks regardless of how much you might save on premiums.

For most families, the smartest approach combines:

• Maintaining essential coverage (health, auto liability, home/renters, life if you have dependents)
• Choosing high deductibles to reduce premiums (self-insuring the deductible)
• Shopping aggressively for rates every 2 years
• Maximizing all applicable discounts
• Strategically dropping coverage only on low-value assets

This balanced strategy provides catastrophic protection while minimizing costs—the real goal of smart insurance planning.

Don’t confuse “not buying insurance because I can’t afford it” with “self-insurance.” One is wishful thinking that exposes you to financial devastation. The other is a disciplined strategy requiring significant wealth and deliberate reserve management.

If you’re considering self-insurance, run the numbers honestly, assess the risks realistically, and make decisions that protect your family’s financial future even in worst-case scenarios. The peace of mind that comes from proper protection is worth far more than the premium savings from gambling uninsured.

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Wondering if you can truly self-insure? Use our self-insurance readiness calculator: Divide your liquid net worth by the maximum potential loss for each risk type. If the ratio is below 2.0, you cannot safely self-insure that risk.

Looking to reduce insurance costs without dangerous self-insurance? Get quotes from 5-7 carriers, increase deductibles to $2,500-$5,000, bundle policies for discounts, and maintain catastrophic coverage while self-insuring only small, manageable risks through high deductibles.

Concerned you’re underinsured but can’t afford more coverage? Explore high-deductible health plans with HSAs, state insurance marketplaces with subsidies, group coverage through professional associations, and aggressive rate shopping to find affordable protection that prevents financial devastation.