In this month's Monthly Financial Jargon series, we address “self-insurance,” an often-overlooked strategy when it comes to financially equipping yourself for anything life may throw at you.
What is Self-Insurance?
Now, what exactly is “self-insurance,” aside from the clear denotation that the term involves insuring one’s self? Well, to put it in the simplest terms, self-insurance involves exactly that: insuring, or financially covering, yourself. The inherent nature of insurance is to provide financial assurance in light of an unpredictable and potentially costly life event. Self-insurance involves setting aside your own funds to pay for a possible loss, as opposed to purchasing insurance and relying on an insurance company to cover a certain amount of the costs.
While insurance is designed to protect you against financial losses you can’t afford to bear, self-insurance comes into play like an emergency fund to cover losses that you can afford without having to pay monthly insurance premiums for a policy that you may never end up having the need for. With self-insurance, you pay for unexpected costs with your own funds, from a medical procedure to water damage in your house, to theft or a fender bender; therefore, you are choosing to risk possibly incurring a loss that you’ll have to pay for out-of-pocket over spending money on premiums for coverage that you may never use.
Final Points
When you hear what self-insurance is, you will most likely realize you already self-insure for quite a few things. Self-insuring and paying out-of-pocket for certain losses has the potential to be more economical than buying insurance from a third party at times. Think of it this way: An insurance company aims to profit via high premiums, while the self-insurance route enables an individual to set aside money to be used directly for the cost of a potential incident, eliminating the cost of premiums. That being said, one of the downsides to self-insuring is taking on the risk of having a potentially costly incident occur. Before choosing the self-insurance route, make sure you thoroughly evaluate your financial situation, as third-party insurance may be the prudent financial decision to hedge against the costly, unpredictable expenses that life can bring.
Monthly Financial Jargon: The world of finance and investments is notorious for its extensive use of jargon. With a goal to enhance financial literacy and make the world of money more transparent, we have our “monthly jargon” articles that focus on debunking financial terms that are often used sans explanation.
Questions and/or interested in how this applies to your financial life?
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