Following yesterday´s wave of interest in The Minimalist Insurance Policy, I decided to share a bit more on this topic. The intent of leaning towards self-insurance is to shift as much risk to oneself as one can bear, and retaining the financial profit an insurance company would have made. In line with that objective it stands to reason during certain times and situations people carry more risk than others, yet most people rarely adjust their insurance policies with these changing situations because in general they are over-insured and don’t think about saving money.
Overall I’m an advocate for owning a cheaper vehicle (if at all!) for many reasons, one being so you can skip the comprehensive and collision coverage options. In this scenario you shift the burden of risk to you for damages to your vehicle in cases such as theft, weather damage, or collision while the insurance company’s policy only pays out if you damage another person’s property or body, or for your medical payments if an un/underinsured person hits you. This means if someone else hits you, or if you hit something, or if your car gets stolen, or a flood sweeps your car away you pay everything. This is risky if you own a new Mercedes SUV and only make $50K/year, but if you drive a 1995 Toyota Corolla and have a few grand in savings it makes perfect sense to drop certain coverages.
An inexpensive car will only cost you at the most a few thousand dollars to replace, so paying hundreds of dollars every year to insure it is crazy. The savings of foregoing the additional coverage will pay for a replacement car in only a few years, and yet the chance that you will have to completely replace your car remains very small. Additionally, when your cheap car gets scratched or dented you’re likely not going to care enough to repair it, so anything other than a major wreck won’t actually impact your bank account.
However, when we consider the variable nature of risk in our lives we should adjust this practice a bit. For example, if you live in a cold climate with much snow and ice during the winter the amount of risk you take increases by self-insuring your vehicle during those wintry months. When you’re whipping around a blind corner and a snowplow truck is sitting stopped in your lane there isn’t much your amazing driving abilities can do to prevent a wreck, and likewise even the best driver in the world can’t stop on black ice. Therefore, you can adjust your auto insurance policy during these riskier months to increase your coverage by purchasing collision insurance along with liability insurance, consider reducing your deductible, or maybe include a towing option for when you slide off the road into a snowbank. Just remember at the end of the “higher risk” winter season to drop those additional coverages and raise your deductible, that way you capture the “lower risk” summer driving season savings with more self-insurance. This can add up to savings of hundreds of dollars each year, ultimately helping you work fewer years.
The same thought process holds true for other applications: In Florida you may want to buy comprehensive insurance during hurricane season to protect yourself from hail or falling trees. If you’re going to live in a high-crime area for a year then consider comprehensive insurance against theft. If you’re going to travel oversees on a two month trip consider dropping all insurance except that which covers storing your vehicle. If you’re going on a long road trip to unfamiliar areas consider upping your insurance for the duration of your trip, especially with roadside assistance or towing since you can’t call your buddies to give you a jump when you’re two thousand miles from home. The key is to reevaluate your risk and adjust your insurance coverage after hurricane season, or when you return from travelling, or when you move somewhere else.
Bottom line: Save money by reevaluating your insurance coverage seasonally and when life circumstances change. Coverage should be flexible to meet life’s continually changing spectrum of risk. Capitalize on lower-risk periods by shifting towards self-insurance while shifting the risk burden to an insurance company during higher-risk periods.
Did you find this post interesting? If so, check out our website at www.minmylife.org. If the subject material of this blog post caught your attention, I recommend reading our post on The True Cost of Paying for Services.