Is it Smart to Self Insure Your Car?
Purchasing car insurance can be a gamble, because you’re relying on the premiums you pay for your coverage to offer enough to protect you in the event of an accident or damage claim. When you are at fault, the insurance company uses the premiums paid by all the other customers to cover what they must pay on your behalf, and then hike your rate so you must pay more. Insurance companies are the ones on the safe end of this bet–they rarely lose anything.
Gambling with Your Car Insurance
Basically, you’re paying for protection you hope you don’t have to use. You’re betting on the fact that you may need coverage; and without making a claim, you don’t collect your bet. However, when you do make a claim, because of the risk you represent to the insurance company, you end up paying more for the protection against an accident, because as long as you’re driving a vehicle, there is risk you will be involved in an accident, and there is always a risk that you will be the the one at fault.
Self Insurance: The Alternative
Many states allow a self-insurance alternative that works like car insurance in the event of an accident. If your state allows this type of program, it typically works like this:
- You deposit cash and/or securities into an account, typically held by the state treasury. The amount of the deposit must cover the minimum liability coverage amount required in your state–usually around $50,000.
- You’ll get a surety bond for the minimum liability coverage amount.
- You’ll go to the local DMV office, present the surety bond, and request the paperwork to file for a certificate of financial responsibility. This certificate is then carried with you, much like an insurance card.
With self insurance, you are assuming the position of the insurance company. If you do not have an accident, the money sits there, and in some cases may earn interest. If you do have an accident, the money in the account is used to cover those damages. If you need the money in the account for some other purpose, it’s easy for you to drop the financial responsibility by purchasing a car insurance policy.
Which States Allow for Self Insurance?
Some states do not allow self insurance unless you own a fleet of vehicles–for instance, Colorado requires you own at least 25 vehicles before you’re eligible for self insurance. State laws are constantly changing. As a result, it is important to contact your local DMV office to determine the most up-to-date rules and regulations regarding car insurance requirements in your state.
Is Self Insurance Worth It?
The reality is, you’re going to pay for insurance coverage, whether you self-insure or pay an insurance company a premium. While you don’t actively pay for coverage under the self insurance plan, you’re still putting a large lump sum of your money at risk. While the money remains yours as long as you remain accident free, it’s a risky bet to take, especially if you’ve poured your life savings into your self-insured auto policy. You cannot guarantee you will not be in a car accident, and you cannot guarantee that if you are involved in an accident, that the other driver or party will be the one at fault.
If you self insure and have to use the funds to cover an accident where you were at fault, then you either have to self insure with another minimum liability coverage amount, or return to a conventional auto insurance company to handle the coverage you’re required by law in your state to carry.