Recently I addressed the topic of "self-insuring" on back of research demonstrating Floridians as being the least happy with their insurance products. It's been a while since I covered the topic and based on feedback I wanted to dive in a bit deeper.
There's a reason Warren Buffet has always loved the insurance business. It doesn't get a lot better than getting paid money upfront that you can invest and benefit from with the potential that you'll never have to pay out any proceeds to the person paying you the premiums. As a society, we're often conditioned to accept the "insurance mindset". We're sold insurance on products that cost as little as a hundred or two hundred bucks. This just in. That will almost never work to your advantage.
My general rule of thumb is to self-insure when and where you have the opportunity to do so. In other words, if you can afford the cost of a worst-case outcome from something that's insured, you probably shouldn't pay to ensure it. Instead, save and invest the money you'd pay in premiums for yourself. That's all the insurance company does anyway. They just reap the benefits rather than you. Instead, create your own insurance fund that you reap the benefits of over time.
The average American spends 12% of their gross earnings on insurance products. Think about the impact of that money saved and invested over time. The median household income is just over $59,000. That means, that the average household spends around $7,100 on insurance per year.
If you had the opportunity to save and invest that money, you'd have the potential for more than $400,000 in just twenty years. That's $400,000 that would have benefitted the insurance companies. You would have nothing to show for having paid those premiums. Now, clearly, there are certain products you can't opt out of such as auto insurance and home insurance if you carry a mortgage. However, if you can and you're inclined it's something that's worth considering.
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