The Self-Insurance Experiment: How Much Risk Can We Afford to Take?
For the past four years my wife and I have been bringing down our expenses while increasing our quality of life. It’s been easier than anticipated because we don’t feel that we’re sacrificing anything in the process. We’ve even have gotten used to some slight discomfort in our daily lives. Think about it–after you have food, clothing and shelter, everything else is a luxury. There are luxuries and then there are insurances that we pay to maintain some of those luxuries.
Sometimes it makes perfect sense to buy insurance. If the loss is something that can be potentially large, infrequent and devastating to your finances, then yes, it makes sense to get insurance. Then there are times when it’s mostly based on having a sense of security, reassurance for uncertainty, or getting a peace of mind, and it can be a punishment on people for being bad at math. If you follow the bobo path, yeah, that’s what we call a fool in Spanish, you’re going to be buying insurance for everything in life, como un bobo (like a fool)! I’d like to think that we’re a little smarter than that.
This year, we made it a goal to review our current insurances and are challenging ourselves to bring down the costs. By doing the numbers, we realized that we can take more risk than we were previously taking, self-insure ourselves, and still be able to have that peace of mind that we look for. Remember that an insurance company aims to make a profit by charging premiums in excess of expected losses. By self-insuring, the profits stay in our pockets.
Self-insuring means that you set aside a pool of money to be used if an unexpected loss occurs. In many instances, it’s a lot more economical to self-insure than to buy insurance. We’re going to be looking into these instances, create a spreadsheet and do the following:
- Record how much we’re saving by opting out of an insurance on an annual basis.
- Add compounding interest.
- Deduct any out-of-pocket losses we incur by not carrying insurance.
- Report to you annually on our experiment in September, starting next year.
Our insurance opt-out items
iPhone Apple Care Plan
I have never bought an Apple Care Plan for an iPhone. Last year, I upgraded to the iPhone 6 from iPhone 4. (The iPhone 4 was handed down to Mrs. Enchumbao and was a huge upgrade from her antique “dumb” phone.) As a result of self-insuring the phone, I’ve learned how to replace numerous things on an iPhone. So far, I had the need to replace the home button and a shattered screen on the iPhone 4. The funny thing was that these things failed way past the warranty expiration date. When you open up an iPhone and get familiarized with the parts, it’s a whole new world! You’re no longer afraid of the thing. You also learn a new skill and get a good sense of satisfaction by fixing it yourself. Since the iPhone 6 purchase fell within this year’s reporting timeframe, from September through August, we’ll add those savings to our spreadsheet: $99
Collision insurance (2003 Suzuki Aereo)
My lovely wifey kept her Suzuki Aereo as our secondary vehicle. With an estimated sale price of $1,900, we can certainly afford to take the risk of a total loss on this car. Another consideration is that we don’t drive far and are excellent defensive drivers. Let’s get rid of this insurance cost and add the savings to our spreadsheet: $85
Comprehensive insurance (2003 Suzuki Aereo)
I can’t imagine a car getting stolen on the guarded parking lots at our firm or at the places we frequent. Even if it happens, the loss is not devastating. Let’s axe this coverage as well, savings: $16
Rental property damage deductible
The damage deductible for our rental property was $750. If we were to increase to $5,000, we could save $325 a year on insurance costs. This means that if the property is damaged by a storm, we’ll need to fork the first $5,000 before the insurance coverage kicks in. We decided to up the limit to $5,000! Savings: $325
Comprehensive insurance (2007 Toyota Camry)
Again, the probability of our car getting stolen is very minimum due to our whereabouts. Savings by eliminating this cost: $100
Transportation expenses (comprehensive and collision for the Camry)
This line item is in our Camry auto policy. The fee is in case we get into an accident, or our car gets stolen, and we need to get a rental until our car is repaired or replaced. Did I mention we have two cars and live within a 5 min drive for work? Sayonara! $27
And we saved the best for last! We never bought life insurances before and probably never will. This one is a huge savings for us. We’ve built up our net worth to a comfortable point where one of us can take years away from work in case of an unfortunate event. Our FU money is our life insurance. How much are we saving by opting out of this insurance? We called our insurance agent and got the following estimate: For a 20 year term with a $1 million in coverage, we would pay $1,575 a year combined, $1,000 for me and $575 for the wifey. For some reason, men are more of a risk. I’m not sure why that is. I mean, we take better care of our health, do less risky things and avoid beer belly at all costs… 🙂 Life insurance? No thanks! Add the savings to the bucket: $1,575
Initial deposit for our experiment
At this point we add up the savings that we will, hypothetically, be depositing into an investment vehicle that yields a 7% annual return. Initial amount: $99 + $85 + $16 + $325 + $100 + $27 + $1,575 = $2,227!
That is a nice chunk of money to begin our fictitious EIF (Enchumbao Insurance Fund). It’s not as sophisticated if we don’t use an acronym!
Review in a year!
By next September, we’ll revisit our experiment and report on the good, the bad, and the ugly: any other insurance savings found throughout the year, interest gained and any out-of-pocket costs incurred by not carrying the insurance. We’ll have it all on the spreadsheet. So far we haven’t had any out of pocket expenses but it’s nice to know that the savings are already there to come to the rescue. Making some of these jumps might seem scary at times but after the insurance Cuco (boogeyman) is out of the closet, it’s no longer scary.
What things in life should be self-insured? When do you think buying insurance is a waste of money?