Self-insurance: When is it the right choice?

Clients often consider self-insuring. That is, they choose to take on a level of financial risk for uncontrollable life events by relying on their personal assets or access to credit. Most individuals choose to self-insure on some level, usually driven by their budget, risk tolerance, and assessment of the possible impact. Examples include declining the extended warranty on a smart phone or choosing a longer wait period before benefits pay out on a disability plan. When life progresses as planned, not paying for unnecessary insurance allows individuals to maximize savings and quality of life. However, life has a strange way of not quite working out as planned, and many of us are impacted by unforeseen events. Consequently, insurance comes in many different forms to protect us from relying on hard-earned savings when life happens.

For many, the risk of funding an unforeseen event by selling assets would significantly affect quality of life, now or in retirement. You may decide to transfer that risk to an insurer at a fraction of the cost. Putting adequate insurance in place to protect against costly uncontrollable events has a minor financial impact compared to the alternative. If you or your family can’t afford to financially absorb an uncontrollable life event, such as a death or significant injury, then you are likely not in a position to self-insure.

Individuals well positioned to self-insure have accumulated significant liquid assets or have meaningful passive income unrelated to their capacity to work. Even then, many individuals with significant disposable assets often consider insurance because many insurance products can be designed to provide both an insurance and investment benefit. Combining insurance and wealth planning can provide protection and investment growth potential within an alternate asset class.

It can be a challenge to set aside the funds required to properly self-insure. Some individuals are forced to self-insure if they are declined for insurance coverage due to health or lifestyle issues. High–net worth individuals who want to consider self-insuring should gauge the risk based on the degree of probability against the degree of impact.

Risk analysis considers probability versus the degree of impact. Where the risk impact is low regardless of the probability, such as buying that extended insurance for your smart phone, a wait-and-see strategy may be acceptable. When probability of risk and degree of impact are high, insurance is likely unavailable. However, where the risk impact is high and the probability is low, such as with an unexpected death or illness, transferring the risk to a third party through insurance is recommended.

Regardless of an individual’s financial ability to self-insure, there are a number of insurance options that can offer attractive benefits beyond just insurance. To book a complimentary in-person or phone appointment with our licensed, noncommissioned insurance advisors, contact insurance@doctorsofbc.ca or call 1 800 665-2262.
—Renee Bricker
Insurance Advisor, Doctors of BC