Self-Insurance : An Alternative Path to Cheap Car Insurance or a Risky Bet?

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Uninsured Driving is Risky BusinessIt’s been said that purchasing insurance of any kind is sort of like gambling. Your car insurance premiums are a bet that covers your financial exposure in the event that you get in an accident. If you are at fault in an accident, and the insurance company has to cover your bet, they do so from a pool of “bets” (premiums) paid by other people.

But, like all gambling, the house (in this case, the insurance company) rarely loses. In fact, car insurance underwriting practices are comprised of complex mathematical algorithms to make sure that they don’t lose, and turn a profit. That’s not a bad thing. If your car insurance company didn’t make a profit, they quite simply couldn’t insure you.

The Gamble

If you think about it, it’s kind of weird. Hopefully you don’t make a claim on your auto insurance policy during the coverage period. But if that’s the case, then you’re not collecting on your bet. Still, that’s what you want, right? So essentially, you’re paying your insurance company for their risk exposure.

What if you were paying yourself for that risk exposure? There are states that will allow you to do just that, in lieu of purchasing auto insurance. Some states refer to it as self-insurance; others call it “demonstrating financial responsibility”.

How Self-Insurance Works

- You deposit cash or securities, typically with the state treasurer, in an amount equal to the minimum liability limit for auto insurance in the state, or
– You get a surety bond through a certified broker in a similar amount, and
– You fill out the paperwork to receive a certificate of financial responsibility from the state DMV. The state-issued certificate of financial responsibility is equivalent to an insurance card.

Worth the Bet?

Taking this route to self-insurance can require a lot of upfront money, typically in the $40 – $50,000 range. Obviously, you must have financial resources available to self-insure. You are taking on the insurance company’s risk, but you aren’t paying an annual premium – in other words, if you’re not involved in an accident, the money you’ve deposited just sits there, and in some cases, actually earns interest. If you remain accident free, it doesn’t cost you anything to self-insure. If you need access to the deposit money (or drop the bond) in the future, simply get a car insurance policy.

The downside is obvious. If you do get into an accident for which you’re at fault, the deposit you’ve made (or the bond agreement you’ve entered into) has to cover the injured party’s expenses, up to the amount you have on deposit. In other words, you lose the bet.

Does your state allow self-insurance, in lieu of purchasing car insurance? Take a look at the information for your state. It’s not an option for most people, but if you have the resources, might be worth considering.