Self-Insure with a dedicated savings account

October 20, 2009
self health insuranceA few weeks ago, fivecentnickel.com had a post explaining how consumers can use dedicated savings account to create their own extended warranty for electronics and other large purchases.  The basic point of the post is that companies make money off of warranties, which means consumers lose money.  Instead of buying the $100 warranty for your new tv, put that money in a dedicated savings account.  If you do this with all your purchases, when one breaks, you'll easily have enough money saved up to cover it.  This way you can pocket the profit that electronics stores make off the warranties.

This exact same principal can be used with insurance.  If you're trying to decide between a high or low deductible plan, why not get the best of both worlds?  Let's say the high deductible plan is $100/month and the low deductible is $250/month.  You can go with the high deductible option, but act like you're paying the $250/month premium.  But instead of giving that extra $150 to the insurance company, put that money in a special savings account (or better yet, an HSA).

At the end of the first year, you'll have $1,800 saved in that account.  That's almost certainly enough money to cover whatever expenses you incurred above the lower deductible.  This is what we mean when we talk about "Self-insuring".  By saving the difference in deductible, you're giving yourself a nice financial buffer so the added risk of the higher deductible isn't actually a threat to you.

The best part is, once you save up enough extra money to cover the entire deductible, you can start keeping all the additional savings.  In the example I gave, that means that you'd be saving $150/month and you wouldn't be accepting any more risk than you would with the low deductible (once you have saved enough).
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