When Should You Self-Insure?

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Some people have an affinity for insurance and buy all the coverage they can get. It gives them peace of mind, at a price. Others are suspicious of insurance and loathe paying premiums for services they may never use.

Calculating when you can self-insure

Count me in that latter camp. But, I’ve tried to be rational in evaluating our insurance options.

For example, there was never any question of carrying life insurance while our son was growing up. But as soon as he was grown, and we had clearly reached financial independence, I cancelled my large life insurance policy.

There was no point in paying those hefty premiums, once we were no longer dependent on my income from work. Same story with disability insurance.

Insurance Perceptions: Playing on Guilt and Fear

The insurance industry has perfected its guilt pitch for life insurance: you are an irresponsible parent if you don’t have insurance in place to care for your children if you were gone. Probably true.

Yet the industry has extended that guilt trip willy-nilly. You’re being reckless or thoughtless if you don’t buy every new insurance product it invents.

I suspect umbrella liability insurance may be in this category. It’s not terribly expensive, and it purports to protect our wealth from all manner of liability, so I carry it. But an insurance rep at a large company confided in me a few years back that she’d never heard of a claim being paid.

Related: How Much Umbrella Insurance Do You Need?

Insurance Realities

Some insurance is clearly redundant. Why would you need payment protection insurance, for example, if you have decent life and disability coverage?

And beware that insurance doesn’t necessarily make covered problems disappear in a cloud of bliss. You still have paperwork, deductibles, copays, coinsurance, and time limits to contend with. And that assumes the insurance company accepts your claims.

Most insurance is better understood as a way to defray costs. This is most evident to me with long term care policies — which usually pay only a portion of your expenses over prescribed time frames. They don’t typically guarantee that you will have no long term care expenses.

Related: Long-Term Care Insurance — Why We Aren’t Buying It

When Should You Self-Insure?

So the short answer to the question “When should you self-insure?” is “Whenever you can.” Remember that insurance is generally a business, run at a profit. That means that whenever you can reasonably self insure, you will also turn a profit. Odds are, you’ll come out ahead in the long run.

But before you cancel all your policies, and put yourself or loved ones at risk, do ask yourself some tough questions:

Will you be “in business” to pay a claim?

This is why you can’t self-insure for life (or disability) insurance, at least not as long as you have dependents relying on you for income. If they need you to be alive and working to put bread on the table, then part of caring for them is buying enough insurance so they are not destitute should you pass from the scene.

But there is still room for discretion in determining how much life insurance you should buy. The insurance industry has rules of thumb for why you should buy a lot.

I think that’s a personal decision and depends in part of where your dependents are in life. If they are healthy, my opinion is that you should buy enough insurance to give them a generous cushion for transitioning their lives (or growing up), but not necessarily so much that they become independently wealthy by virtue of your exit.

It’s not enough just to be “in business” (alive).

Could you afford to pay a claim from your liquid assets?

You’ve got to have the cash flow to make good, without taking losses elsewhere. That’s why most people can’t self-insure their home (even though the chances of losing a home to house fire are miniscule) or health care. However you can crank up those deductibles.

Related: Retirement Healthcare–What Are Your Options?

And you might be able to self-insure your auto in some cases. Auto liability is required by law, so you don’t have to consider that option, but dropping auto collision coverage can be viable. To do that, you must keep $5,000-$10,000-$15,000, or whatever you think you’d need to pick up some reliable used transportation on short notice, available in an insured savings account or low-volatility investment.

I’ll guess that’s where most people get cold feet and decide to pay an insurance premium instead: it’s a lot of cash to part with all at once. Just be advised, you’re effectively making the same payment, over time, via an insurance premium. Which brings us to the next question.…

How likely is a claim?

Insurance companies have the data and the business volume to answer this question very precisely. That’s why they can run highly profitable businesses under conditions where we, as individuals, cannot.

Still, there are situations where we have pretty good data, possibly even an edge over the insurance company. You know your family health history. You know the individuals in your family and how they behave.

For example, after my son had been driving a few years, I dropped the collision coverage on his 12-year old vehicle. I knew he was an excellent driver, and a quick back-of-the envelope calculation told me that it just wasn’t worth the premium we were paying to insure the current salvage value of that vehicle, given the low probability of an accident. We could self-insure

How does that math work? Well, here is a simple formula I learned for evaluating probabilistic problems in engineering school: premium = loss x probability. So if you’re putting a vehicle worth $5,000 at 5% risk of loss annually, a “break-even” premium would be about $250/year. Anything higher than that, and you’re better off self-insuring. (An actuary could provide a more sophisticated analysis, but I suspect this is close enough for our purposes.)

Math vs. Emotions

Self insuring can be scary, no doubt. Sometimes insurance feels cheap for the peace of mind conferred.

For example, I’ve made some impulse insurance buys over the years related to major appliances. I generally abhor maintenance contracts and service plans, but, on a couple of occasions, when the appliance seemed expensive and the plan seemed cheap, I’ve gone for the bait. It’s always been a mistake. We’ve yet to collect: all our appliances have outlived their service contracts without major repairs.

Similarly, a few years ago, I was offered a service contract on our small RV. The plan was around $60/month and covered a litany of Murphy-esque problems for every major system on our rig. The glossy brochure was complete with stories from grateful travelers who had major repair bills paid, and their vacations saved from heartbreak. I nearly took the bait again.

But then I looked at the hefty deductible, and the low probability of most of the failures, and realized I’d make a profit if I self-insured. At this point, I’ve already saved more than $800 by not buying that policy — enough to pay for the first major repair, should it materialize.

I’ll admit there is one area where I’ve always found it easy to justify a service contract: my computers. Access to a functioning computer has been critical to my livelihood ever since the start of my career. Being down, even for a few hours, is guaranteed to produce frustration, and possibly even loss of income. I’ve never had a problem paying a few hundred dollars annually to avoid that. Since computers were my profession, I had a good feel for the costs and benefits. And, I’ve exercised those computer service contracts a number of times over the years.

Insuring my computers has essentially been a business decision. Ideally, you should evaluate all insurance unemotionally, with the same cold look at the financial facts you’d use for running a business. Neutralize the sales pitch. Ask yourself the tough questions. And make a rational choice.…

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[The founder of CanIRetireYet.com, Darrow Kirkpatrick relied on a modest lifestyle, high savings rate, and simple passive index investing to retire at age 50 from a career as a civil and software engineer. He has been quoted or published in The Wall Street Journal, MarketWatch, Kiplinger, The Huffington Post, Consumer Reports, and Money Magazine among others. His books include Retiring Sooner: How to Accelerate Your Financial Independence and Can I Retire Yet? How to Make the Biggest Financial Decision of the Rest of Your Life.]

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  1. The insurance rep who said they never paid out on an umbrella policy might be correct. What she may have omitted however was the expen$ive legal maneuving that helped them avoid paying anything. Legal protection is an additional benefit of umbrella policies. IMO, the higher the limit, the more aggressive the insurance company is likely to be in protecting their money.

    If you are living off your investment portfolio, especially one that is not protected from creditors, it is essential to have umbrella coverage.

  2. Thanks ERE, that's a valuable perspective. It would be nice having the insurance company's legal staff going to bat for you. Seems less likely that somebody would pursue a spurious claim in that case, though I don't know for sure. Anybody else have real-world experience with umbrella insurance and/or broad personal liability protection?

  3. Darrow,

    I am a case manager for a personal injury law firm in Florida. It is pretty rare that claims exceed the normal limits and move into the excess but it does happen. Typically, umbrella policies are purchased to protect an individual with assets from being personally liable.

    The underlying coverage is usually $225,000 or $500,000 before an umbrella (considered excess) coverage kicks in. While it doesn't happen often, it does happen where damages exceed the underlying limits.

  4. One proviso to this article is make sure your largest asset, your home, is fully insured in retirement! If one has a huge mortgage or is underwater there might not be a reason to fully insure (unless the mortgage requires it, which may be the case), but you need to insure your largest asset against loss!

    A couple down the street owned their home free and clear. A Fourth of July fire (from their bar-b-que, no less!), resulted in the loss of their home, which had been willed to them by her parents who passed away a few years ago.

    So don't chince out on home insurance if you have a great deal of equity in it!!!

    Disclaimer — I'm not an insurance agent or salesperson; nor am I a real estate agent or broker.

  5. I agree with you Craig. And note, even without much equity, there is an ethical/legal obligation for the debt. Our home is fully insured, though we carry a fairly high deductible. A prerequisite for self-insuring is that you have enough assets to make good on any losses! Thanks for the comment.

  6. Insurance sucks, until you need it. Obviously, you don’t want to overinsure, but get enough insurance to where replacing/repairing the damaged item won’t severely impact your net worth.

  7. Definitely agree with fully insuring your home and taking hurricane coverage where applicable. Also be sure to get replacement value on contents of home, otherwise you only get a reduced value for the age of the home contents. Hurricane charley went right over us and we sustained roof damage, our pool cage moved out of place by an inch and pulled up on the corner causing it to need replacing, all screens tore out. Shingles blew into the pool causing scraping of the surface. An egress window in the front bedroom sucked out and water and wind blew in requiring us to pull a closet sliding door off its hinges and with much difficulty due to the wind force we nailed it in place over the window. Water still came in ruining the furniture in the front bedroom but we managed with mop and bucket and blankets to keep it out of the other rooms. Our insurance adjuster was from the east coast of fla and knew what a pool cage was and the cost of them. Other people were not so lucky and had to argue with adjusters who had come from other states and had never seen a pool cage and low balled the cages. All in all we were extremely fortunate. Insurance saved us many thousands out of our pocket. This was when my husband had first retired and costs of 50000 out of our pockets would have been a big blow to our investment accounts. There are still abandoned homes from hurricane charley where people had no insurance.

    1. Jean,

      Excellent advice to consider specific circumstances you may face in your specific geographical area, and to make sure your policy adequately covers these circumstances. We added earthquake insurance after waking up about a year ago to our house shaking. Luckily, we didn’t suffer any financial damages, but it was something we never considered at all coming from PA where earthquakes aren’t a threat.


  8. I needed disability coverage, which is expensive. But I did a calculation as to the amount my portfolio would need to generate the same benefit, and put a tickler in my calendar to cancel that policy as soon as I crossed that threshold. I see plenty of parents carrying life insurance after the children are gone and no longer dependent. Good advice: buy what you can’t cover on your own, and not a penny for more.

    1. I plan to keep our life insurance in place until the term runs out. My probability of death goes up year after year but the premium stays the same, so every year it becomes a better deal. The premium is essentially subsidized by my past self (who didn’t have enough assets to self-insure for death).

  9. Maybe someone could help me out on this. I have a $200,000 twenty year term life insurance policy that I took out when I was 57 years old.
    I am now 69 years old so the policy will expire in 8 years. The monthly premium is $72. We have no kids, so it is just myself and my wife. Do you think it is wise to continue paying the premium, or just cancel this policy ?

    1. Louis,
      Unfortunately you do not provide enough information for people to provide you any advice.
      Since you don’t have children, you’re in the clear in that area. However, you still have your wife.
      It depends on the size of your investments you both have and if all of them will go to your wife in case you pass away first.
      It also depends on what other sources of income will be lost once you’re gone (pension, annuity, SS benefits) and if it will hurt her financially once that money is gone. So, it does depend on how financially independent you both are.
      It’s a very small benefit at a very high cost and I would drop it for our family’s purposes, but your family’s finances could be very different than ours.

      1. Thanks S&M ,

        I didn’t stop to think about the SS and Pension benefits , that helps with the decision.
        Thanks, Louis

    2. Louis,

      You share a good bit of information, but IMHO omit the most important. WHY do you have the policy? If you pass away, would the $200,000 materially improve your wife’s circumstances? Asked even more simply, is she dependent on your income and would this be enough to make her life better/easier if she lost it upon your passing?

      If the payout upon your death wouldn’t be of use to her because you’re already financially independent, then why would you keep it? Conversely, if it is too small a sum of money you may want to buy more insurance to backfill that need, though it is highly unlikely you would buy it at as good of a rate as you’re now 12 years older and thus it is more likely that the policy would need to pay out than when you were younger.

      Hope that provides a useful framework to think things through.


      1. Thanks Chris,

        That question of WHY like you say has made it easier to make my decision .

        1. if the 20 year policy was LEVEL term, i.e. payments were/are the same each of the 20 years, then you might consider that the OUT years, the older years, are a relative bargain actuarily.

      2. I’m surprised that no one discusses permanent life insurance in the FIRE community! Particularly, given today’s low interest rates, whole-life insurance is a valuable asset to own. I bought a policy at 52 and it is my favorite investment because of its versatile utility and favorable tax treatment!

        1. Brian,

          What features of permanent life insurance do you find that make it more valuable in the current environment? Do you have any resources that you would recommend?

          I’m open to new ideas, such as being turned on to I Bonds by the recommendation of a few readers recently as I wrote about here. However, I haven’t seen anything that makes me feel that permanent life insurance is a good deal for most people.


          1. I will say that my policy is a 10-pay (10 annual payments) for a guaranteed life benefit that is multiples of the investment outlay. IMO, it is a no-brainer for people such as you (with a spouse/child; available extra cash; and likely decades for compounding). I may use it as an extra non-taxable income stream in retirement or for chronic illness (since I have no children). Check out articles on the Mass Mutual website.

          2. In your case, it wouId act as a hedge against equities; replace your SS income for your spouse; allow you to draw non-taxable income to reduce ACA/Medicare premiums; fund a college education; and secure family wealth for your child).

    3. Cost/Benefit Analysis: You pay $72 × 12 months × 8 years = approx. $7k for a potential $200k benefit. Add back the $11k you’ve already paid and that’s a 10-bagger in my book! And if you outlive the policy, you’ll recoup your costs thru SS and Pension within months. No matter, if you need it or not, life insurance is a very valuable asset to own.

      1. Brian,

        I would disagree strongly with the “if you need it or not” part. All insurance, in sum, is by definition a losing bet mathematically. The insurance companies MUST take in more money in premiums than they pay out in benefits. If they don’t they’re not an insurance company, but a ponzi scheme that will run out of money. That is simple math.

        That is not to say that insurance is bad or that it doesn’t have an important place in a financial plan. Just that we need a framework to consider how to use it. Getting people to think about that framework is the purpose of this article.


        1. again, it’s not necessarily a losing bet EACH of the years of a 20 year level term. the front years are losers from an actuarial standpoint, the back years are cheaper.

    4. If you have any health issues that could shorten your life then 72 dollars a month is cheap for a return of 200000. If that 200000 could make a difference for your wife, then keep it. There is no way you could invest 72 a month for 8 years for a return of 200000.

  10. I agree to self-insure or reduce insurance needs to catostrophic coverage only. Our practice:

    1) Homeowners. Shop around every 1-3 years (if I see an unusual rate hike). Got highest deductible possible ($5k).
    2) Auto. Shop around every 1-3 years. Use insurance broker and call a few that the broker doesn’t cover. Got highest deductible ($3k). Liability only if the car is worth less than $15k.
    3) Health insurance. Via employer. Little in terms of options here
    4) Long-term care. They all seem very expensive and have lifetime caps ($1M, $2M). Am self-funding. Net worth is covering this exposure.
    5) Life insurance. Self-funding. Agree if your younger and don’t have high NW, you probably need this.

    1. Sounds like a solid framework Phillip. Thanks for sharing,


  11. I appreciate this article and agree in general. (Self insuring things like aging cars for collision damage is a no brainer if you can afford the loss.) However, there are exceptions and my flat rate term life policy is one of those. I signed up for my policy like many do, when my children were young. And having just reached empty nest status (with self sufficient kids, knock on wood), I could certainly cancel my policy. However some quick math tells me I’m paying 1/10 of a breakeven rate for the last 5 years of that 25 year policy. Mortality tables say a man of my age (58) has around a 1/100 chance of dying any give year. (Those numbers probably were worse during Covid.) But I’m only paying about $1000 a year for $1,000,000 of coverage. I’m a gambler and while this is a bet I’d rather not win, I can’t walk away from a bet where I’m getting that crazy of a positive ROI.

    1. Kimber,

      You make a good point that when you buy a term life insurance plan that you’re getting a better deal at the end when paying the same rates as you did at the beginning when your risk of dying is much lower.

      That said, I’ll push back on the idea that you’re getting “that crazy of a positive ROI.” YOU will never get a positive ROI. If you are alive, you are guaranteed a negative ROI as you’re paying money in premiums for a benefit you will never see. So the question to my mind is how will the payout positively impact your beneficiaries vs. what you could do (for them or yourself) with that $5,000 in remaining premiums that you haven’t yet paid.


    2. Chris,

      Respectfully, I’ve been a lurker on the blog for a couple of years now. I particularly look forward to the Best of the Web durations. I also enjoy many of yours and Darrow’s articles.

      That said, your statement about all insurance being a mathematically losing bet is simply wrong in the case of permanent life insurance. I agree that is the case with term, which is why I don’t understand why more affluent folks don’t purchase permanent policies, instead.

      I caught up on your article on I-bonds last night and admit I didn’t know anything about them (and I consider myself well-versed in the personal finance arena). I would say that Whole Life is an enhanced I-bond. Similar investment return, but non-taxable and cash accessible in the interim.

      I would challenge you to obtain a whole life illustration and then tell me how it is a mathematically losing bet (on an absolute basis and relative to bond proxies).

      1. Brian,

        I think the reason that you don’t see more affluent folks purchase permanent policies is because they’re expensive, complicated, and unnecessary. I think the framework I outlined about insurance being a losing bet and the framework Darrow laid out in this post about buying insurance only when you need it are wise starting points. I’m sure there are exceptions to where tax advantages or other specific circumstances may make insurance make sense for some individuals, but I don’t understand what those are and I haven’t found anyone who can explain it clearly. So for most people I think it is unnecessary at best and likely harmful.

        When I asked for sources, you recommended an insurance company’s website. I also deleted the link that you submitted for the insurance pro blog after checking it out. That is not independent research. That’s marketing material from people who sell whole life policies.

        Listen to independent and reputable researchers. For example, Wade Pfau was on the Bogleheads on Investing podcast. Pfau is an advocate of using whole life policies. But listen to his explanation when he was asked how a consumer can make sense of them and find a good policy at a fair price. Here is a link. https://bogleheads.podbean.com/e/episode-024-dr-wade-pfau-host-rick-ferri/

        A similarly complex and expensive product is a variable annuity. Listen to this interview with a reputable researcher and advocate for these products. He makes a compelling case until he was asked the simple question how do normal people sort the good from the bad annuities and find one that makes sense. He admitted that he had to have his PhD finances students sort it out and explain the contract to him before he purchased one. https://www.morningstar.com/podcasts/the-long-view/55

        If the experts who study these products can’t figure out how to buy a good one on their own, what are the odds that an average DIY investor is going to find a salesman who will educate them and present a policy that is in the investor’s best interest to buy? Until I can answer that question, I can’t get behind these products.

        Hope that clarifies.


  12. First off, I’m not an insurance agent, but in my career I had to learn a bit about insurance. The classic use for insurance is to protect against low probability events that have a high loss potential. If the issuer makes a profit, so be it. I just need to find the right policy. The RV mechanical policy cited is the antithesis of the classic use.

    Also, regarding the umbrella policy, at issue these days for liability insurance was pointed to by a prior poster – costs of a lawsuit can be as financially debilitating to a defendant as the damages awarded. Remember also that an umbrella policy should cover claims omitted under auto or homeowner policies.

    In my opinion, if you treat insuring against risk of loss, be it life, health, property or liability insurance, as the alternative to investing the premium with attendant ROI, in the same way you would analyze an RV mechanical policy, you open yourself up to the potential for major losses.

    1. Guy,

      I think your comment is in agreement with the general tone of this post. The point is not that you should never use insurance. The point is that you should be thoughtful about whether you actually need insurance or not, because any insurance you buy is statistically a losing bet for you and a winning bet for the insurance company who must take in more money than they pay out. However, they can also spread out risk among a large population in a way that individuals can not, which is why you absolutely SHOULD buy insurance against events you can’t afford to take (including life, health, property, and liability as you point out).


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