Self-Insurance Made Simple: What It Means, Why People Do It, and Real-Life Examples

When most people think of insurance, they imagine paying a company a premium every month so that, if something bad happens, the company covers the cost. But there’s another way—self-insurance. This doesn’t mean you buy insurance from yourself. Instead, it means you set aside your own money to cover possible losses instead of paying an insurance company.

What Is Self-Insurance?

Self-insurance is when you decide, “I’ll cover the risk myself.” Instead of paying premiums, you keep money aside for emergencies. If something goes wrong—like your car needs repairs or you have a medical bill—you pay for it directly.

Believe it or not, many people self-insure without even realizing it. For example:

If you choose a high deductible on your health or auto policy (say $2,000 instead of $500), you are agreeing to cover the first $2,000 of costs yourself.

If you decline an extended warranty on your new laptop or TV, you’re saying, “If this breaks, I’ll pay for it myself.”

These are small forms of self-insurance.

Benefits of Self-Insurance

The biggest advantage is saving money on premiums. If you’re unlikely to use the insurance and you can afford to cover the costs yourself, why pay hundreds of dollars every year to a company?

Maria has an old laptop worth $400. An extended warranty would cost $150. She decides not to buy it. If the laptop breaks, she’ll just buy another one. That’s self-insurance, and it makes sense.

Risks of Self-Insurance

The downside is obvious: if something expensive happens, you could face huge bills.

Example:

Imagine you decide not to buy homeowners insurance. If your house burns down, you would need to pay hundreds of thousands of dollars to rebuild. Unless you’re very wealthy, that’s a financial disaster.

This is why self-insurance is usually only practical for smaller risks or for people with enough money to handle big losses.

How Companies Use Self-Insurance

Self-insurance isn’t just for individuals. Many U.S. employers use it for health benefits. Instead of paying an insurance company to cover employees, the employer sets aside a pool of money and directly pays for claims like doctor visits and prescriptions. This saves money if claims are lower than expected, but it’s risky because the company takes on the full cost of care.

A Balanced Approach

For major risks, most people don’t go fully self-insured. A common middle ground is to keep insurance but raise your deductible. That way, your premiums go down, but you’re still protected from catastrophic losses.

Tom raises his car insurance deductible from $500 to $2,000. He saves $400 a year in premiums. If he has a small accident, he pays more out of pocket, but if something huge happens, insurance still covers the big costs.

The Bottom Line

Self-insurance is a smart strategy in the right situations. It works well for small or unlikely risks, like electronics warranties or high deductibles, where you can afford to pay if something happens. But for big-ticket items like your house or major health expenses, it’s usually too risky unless you’re wealthy.

The key is balance: save money where you can, but make sure you’re protected from financial disasters. In many cases, a mix of traditional insurance with higher deductibles plus some self-insurance for smaller risks is the safest and smartest choice.