Self-Insurance: The 21st Century Protection

The Rules Have Changed: I was forced to “self-insure” the cost of rebuilding my home.

A few years ago State Farm sent me a small notice that I now have “extended” not “full replacement” coverage on my home. I called to get my full replacement coverage back. The underwriter declined to cover the cost of rebuilding. State Farm’s decision to reduce its corporate risk was final despite my 20-year loyalty. It will not pay the cost of rebuilding my home if lost. So I raised my deductible and cut every extra the agent had added years ago. I am saving and investing $300 a year.

You too may be overpaying for “insurance” and other financial services you don’t need by about $3,000 a year. Most of those we help have found that they have overpaid for insurance and other services all their adult lives. They conclude that if they had invested the savings of $3,000 annually for 30 to 40 years, they would be millionaires by now.
How is this possible? In one sentence, we don’t know what we are buying and thus we can’t buy only what we need. Our society does not teach us to understand money and financial services. Thus we are prone to overpay for products a salesman has convinced us to buy.

For example, most “insurance” policies include items you can do without or are already paying for already. Your auto policy may have health care, towing, rental car, funeral and other extras. Your homeowners may have fire arms, tiara and contractor’s coverage. You can reduce your vehicle and homeowners’ premiums by 42% by buying only what you need and taking higher deductibles. Of course, you are not likely to know what you don’t need, unless the salesperson educates you. However, the commission is increased by the extras you don’t know you could drop.

A self-insurance fund or “Wealth Reserve” is a reserve you accumulate with the premium you don’t send to the insurer. You earn money on the money invested just like they do. When and if you have a claim or need a deductible, you take it from your Wealth Reserve, just like the insurer would. The difference is that savvy buyers don’t pay more than they need to for anything. Most businesses self-insure some of their risks.

Your self-insurance fund or Wealth Reserve can grow until you need it. The premiums and fees you save by buying smart can create a Wealth Reserve large enough to insure many risks with the same funds. You are not likely to face additional expenses all at once. In time, the compounding effect turns the accumulations into a Wealth Reserve that serves to pay for not only your deductibles but also temporary in-home care or confinement in a nursing home, if needed, or a family legacy and your funeral expenses. In short, you self-insure for the risks you can manage and insure the catastrophic risks you can’t afford. Your savings pay for the risks that are very unlikely to happen but could change your lifestyle.

Insurance was originally intended to transfer risks that could wipe out your financial future. The intent was not to replace sound financial practices. For instance, a legitimate insurance premium of $13 a month for $500,000 of life coverage represents a real transfer of risk of a catastrophe hitting your family. Your death would rob your family of the life you have made together.

However, paying $215 a month for the same coverage in a permanent policy because “it builds cash value” or “forced savings” makes no sense for a 31 year old. That excess premium of $202 per month could create a real Wealth Reserve of $1.3 million in 35 years. Adding all the premiums and fees you save from insurance, banking, brokerage, and other financial transactions you don’t need, can create a huge pile of money to serve as your “bank” when you need to buy major appliances and perhaps a second car. Many of our members have accumulated substantial Wealth Reserves which finance cars, vacations, college, and businesses.

Our members have shown that savings can come from almost every facet of their lives. Some members have found $100, $200 even $500 a month to invest in their Wealth Reserve. Over time, they have accumulated large Reserves which help them get them what they want for their families. http://www.theinsidersguides.com/selban21.html

Many members have seen the wisdom of self-insuring long term care needs instead of buying insurance. Two policies started at age 65 could cost over $120,000. Your family may never get to make a claim. You must keep paying premiums for ever, even when they go up as they did in 2000. Almost a THIRD of policyholders have let their coverage lapse. ConsumerReports.org reviewed 47 policies in 2003. They concluded that “for most people, long-term-care insurance is too risky and too expensive.” New treatments may not be covered. Insurers may fade. Family care at home is the norm. Almost half of nursing-home stays last three months or less and are paid by others. 2/3 of us will either never go to a nursing home or will spend less than three months in one. Life insurance riders are expensive and insufficient. Self-insuring is better for some.

Below is a copy of the worksheet for one member, the King family. They used our Insider’s Guide to Your Spending Plan to complete a financial strategy to meet their goals: http://www.theinsidersguides.com/spepla31.html


EasySheet Where Wealth Reserve contributions come from:

Monthly expense savings for King family: Your family:

Vehicle (2) insurance $ 56 $_________
Homeowners insurance $ 11 $_________
Permanent UL life insurance $ 167 $_________
Mutual fund fees $ 83 $_________
Mortgage insurance PMI $ 103 $_________
Accident insurance at work $ 33 $_________
Umbrella liability insurance $ -18 * $_________
Bank fees $ 10 $_________
Credit card finance charges $ 125 $_________
Other fees, commissions, charges $ 30 $_________

Total amount saved monthly $ 600 $_________

Saved annually $7,200 $__________


Projected Spending Plan for King family: Your family:

Ten year accumulation $139,403 $_________

College funds
Vacation home

Twenty year accumulation $599,489 $_________

Small business startup
Travel
Luxury vehicles

Thirty year accumulation $2,117,948 $_________

Retirement supplement
Foundation creation
Legacy

*Umbrella liability insurance was new expense King needed to spend. Accumulation estimates assume an investment in a market index fund with the same economic performance in the future as in the last 50 years.