SELF-INSURANCE: A DIY Project to Avoid!

Ever take pride in something you did on your own? It could be something as simple as preparing an expense tracking sheet or as involved as a home repair. American society celebrates those that are self-made. It’s why we hold entrepreneurs on a pedestal; like Steve Jobs that took Apple from a garage to the iconic company, it is today. The American dream still holds power today, founded on the principles of working hard, being self-sufficient, and tackling the world one day at a time.

But when it comes to insurance, is it the right choice to “do-it-yourself”? “Self-insurance” is the idea that one can insure themselves by simply building more assets. Unfortunately, the reality of “self-insurance” is that it is no insurance at all.

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Unpacking the Concept of Self Insurance

The concept of self-insurance is rooted in individualism–the notion that anyone can do anything with a little research and perseverance. Self-insurance builds off of this concept. The point is to have enough finances so that in an unexpected life event, your assets provide enough cushion to fall back on in hard times. Is this really the right way to approach your finances, though?  Should you always rely solely on your own merits, or is there a reason for the existence of traditional life insurance companies?

Think about all the different types of insurance you buy. If you own an automobile, you will have an auto insurance policy. If you own a home, a home insurance policy is also likely. You could have a life insurance policy, and another liability policy for your business. On top of all that, you may even have an umbrella policy to provide an additional layer of protection.

The Do-it-Yourself Approach

America’s glorification of individualism is inspirational to many, yet it also makes for a great marketing opportunity. Think about the oversaturation of do-it-yourself advice. Any of the following phrases sound familiar?

  • Want to build your dream home? Do it yourself! (If you buy our plans, our materials, our tools…)
  • Need a will or trust? Write it yourself! (Just pay for our legal forms and advice as models…)
  • Car trouble? Fix it yourself! (The parts store is just down the street…)

The almost obsessive compulsion to operate independently has only made marketing agencies work smarter, all while the average person works harder. And not always for better results.

This obsession can sometimes lead to distrust of all large institutions as “out to get your money.” And while some institutions may deserve that distrust, it requires a critical lens to determine the difference. Some corporations and companies can often help us yield ideal results when it comes to professional expertise and know-how.

How Insurance Works

When you pay for an insurance policy, what exactly are you paying for? Surprisingly, many people don’t know the full scope of the insurance industry. They know that they put in money on a monthly basis, and on occasion make a claim that covers an unexpected cost. When you look at it this way, it’s no wonder people want DIY insurance, or minimal insurance. Yet in order to understand what options are going to make financial sense to you, you’ve got to know how a policy works.

Insurance is a method where individuals can share financial risk by spreading the cost of potential loss among many people. It’s based on real data and allows many people to be protected. Your premiums are calculated to fit this formula, and also cover you, and the risk then falls on the insurance company first.

Yet if you have the cash to cover losses, why wouldn’t you want to cut monthly premium costs? Garrett Gunderson, author of Killing Sacred Cows, puts it like this: “Producers (i.e. productive, wealth-building individuals) love insurance because it transfers their risk, and they know it saves them money in the long run.”

In other words, the more assets and resources you have, the more you should want insurance, not want to get rid of it. If you had a home with a value of $1 million dollars, and $1 million in the bank, you could just call it a day and skip the insurance. After all, household fires aren’t that likely, and you’ll have the cash to cover it. Yet people often adopt the, “It won’t happen to me” mindset. And what if it does? Then it’s up to you to replace your assets, and you’re back at square one.

With home owner’s insurance, you can have the peace of mind that not only is your $1 million home safe, so is your $1 million bank account.

Additionally, without the insurance to cover the risk of losing your home, how aggressively would you want to invest your money? Likely you’d choose something safe, in the event, you do need the money–if you’re serious about insuring yourself. On the other hand, if the insurance premium gave your permission to invest more widely with your money, wouldn’t it be a sound and profitable financial transaction?

The Risk Paradigm

Self-insurance misses the mark where risk is involved. Typical financial planning places too much emphasis on short term gains, without looking at the big picture. In this case, it’s the paradigm that decreasing your risk in one area makes it possible to achieve higher returns in another area.

In the case of the $1 million dollar home, by paying the insurance company to take on the risk, you can have more freedom to pursue other opportunities. In other words, your home is covered, and you can put your liquid cash to work elsewhere.

Understanding the real correlation between reducing personal risk to increase returns can help you build more long-term wealth. 

The Appeal of Self-Insurance

In many instances, having as much insurance as you can get makes sense. Especially with whole life insurance, which offers benefits and returns that you’d be hard-pressed to find elsewhere. Yet there are some cases in which it makes sense to examine your premiums from a cash flow standpoint. 

Often times, monthly cash flow is the other underlying reason behind self-insurance. With the way 2020 has been trending, it’s no surprise people are looking for ways to cut costs wherever they can. Yet the need for more cash flow doesn’t eliminate the risk of other undesirable events. For self-insurance to work in the first place, it demands that you have the funds to pay for accidents as they happen. If you’ve experienced pay-cuts, layoffs, or poor health this year eliminating your remaining insurance may not be the right move. Otherwise unforeseen events can pile up, and you’ll start to rack up costs.

Rather than under-insuring and then making up the difference, increase your monthly cash flow by raising your deductibles and maintaining the right amount. This means striking a balance by having realistic deductibles–that you can pay should you need to–without premiums that feel like they’re draining you from month to month. 

If you’re a savvy driver, you can likely afford to raise your deductible. On the other hand, if you have health complications and a high health deductible is preventing you from seeking care, you might need to reevaluate. There are a number of considerations when it comes to proper insurance, but forgoing it completely can put you at risk. Don’t let a lack of insurance be the thing that makes you backslide from Prosperity.

The Economic Value of Certainty

When people pool resources to share risk, one of the benefits is a higher level of certainty. Even in the event of the unexpected or undesirable, you know you can respond. Self-insurance, on the other hand, can be easy to forget if you’re only in it to save in the short-term. Should the unexpected occur and your funds aren’t readily available to you, you can easily revert to panic mode. Don’t live life waiting for the other shoe to drop.

Instead, take the peace of mind that certainty provides, and use that to make even better decisions and investments, pursue bigger dreams, and focus on long-term results. 

And historically, entire societies benefit from the economic value of certainty. Feudal societies of the past often languished at the subsistence level because of instability and uncertainty. When you’re fearful that your wealth and life’s work may be wiped out in an instant, it’s hard to commit time and resources to any long-term projects. 

We like what financial commentator Les McGuire has to say about the economic value of certainty:

“What people really want, when their minds are opened to the possibility, is the maximum value in every area of life with as much certainty as possible. Even those who are self-proclaimed risk-tolerant are kidding themselves. We should assume that everyone has a risk tolerance of zero, meaning that if it were possible, they would want every economic choice they ever make to work perfectly. no one really wants to lose money; they just think it is a pre-requisite to making big money because that is what they have always been told. If they could make the same returns with no risk, everyone would want to.”

Hang On to Your Insurance

For many Americans, one of the consequences of COVID-19, and subsequent events, is a loss of job and insurance certainty. Some businesses have shuttered, while others are just getting off the ground. It hasn’t been an easy year, or a predictable one and the effects are showing. This is when the do-it-yourself mentality begins to kick in. People want to cut costs at all costs, and in the process expose themselves to greater risk.

And while it’s easy to think that you won’t suffer a loss, or you can cover your losses yourself, that’s not always the case. Admittedly, there’s sometimes a difference between what is ideal and what you can afford. Yet now if the time to make sure that you share as much of your financial risk as possible. There are a lot of productive things you can do on your own, yet insurance is definitely most effective as a group effort.

That’s why now might be a good time to meet with us and review your situation. Our economic prosperity knowledge might give you options to rearrange your coverage, yet maintain a higher degree of economic certainty that can help you maintain your prosperity plans, and/or reposition you to succeed again.

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