Financial

Finance Series: Self Insurance

In this, the last part of our three part series that takes a look at the financial aspects home maintenance, we'll talk about insurance. Generally speaking, most people like insurance. It makes them feel safe and secure. Some people would insure for every possible contingency, no mater how remote, if only there was an insurance product available for it.

The idea of insurance is good, and we want to have insurance, but there needs to be a proper risk assessment made before insurance is bought. Insurance is really meant to cover you for catastrophic events. Things that would effectively wipe you out financially, like the loss of a home to fire or the loss of a car. For other things, you want to look at the actual chances of a loss to the replacement cost and the related insurance premium. Would I insure my wedding ring? Probably not; for one it’s not [that] expensive, two, it pretty much never comes off my finger so I don’t see me losing it down the sink, third, if I were to actually loose it once in my life time, the cost of the insurance would have paid for it once or twice anyway. In the end it’s what you feel comfortable with.

Now we’ll look at the insurance we do get and their various deductibles. Insurance companies use deductibles to discourage claims for every little mishap that may occur. They generally also encourage higher deductibles with a reasonable reduction in premium rates. Remembering the first two parts of this series, the buffer and the budget for equipment replacement, and keeping in mind that we are insuring for catastrophic events, we can use this money a “third time”, so to speak, to increase the deductible and reduce our insurance premiums. This is the key point; if you’ve saved to replace the furnace but you’ve lost your house to fire, insurance is going to replace the house, including the furnace, so why not use that money to increase your deductible and reduce your premiums. You are effectively self-insuring yourself up to the deductible amount, using insurance to cover you for catastrophic event, but covering minor events yourself --- self insurance.

You can also use the money to increase the deductible on you car insurance. We’re talking about catastrophic events, so a $1000 deductible shouldn’t “wipe you out”. When you compare the risk of having to make a claim to the savings in premiums, you’ll usually find that going from a $300 deductible to $1000, will pay for itself.

Again, you have to weigh the risks --- and everyone’s is different. In most cases the premium you save will more than pay for the increased deductible, over the years.