Q. I’ve heard people use the term “self-insure” instead of buying life insurance or long-term care insurance. But if I don’t have a lot of extra money to save, can I really self-insure?
— Working it out
A. Purchasing insurance is a way to transfer risk.
Self-insuring means you keep the risk for yourself.
It’s a strategy often used by the wealthy, as they can spend more money without drastically impacting their standard of living.
Everyone self-insures to some extent, said Dean Shah, a certified financial planner with Stonegate Wealth Management in Oakland.
For example, when you pay a deductible on a loss such as for an auto accident, you are self-insuring for that part of the loss, he said. Then the liability for the remainder of the loss is transferred to the insurance company and that is the reason you pay premiums for coverage.
Shah said many people have the wrong idea of insurance. It’s meant to cover large unpredictable losses whose occurrence is not related to your behavior.
“If you present a larger risk to an insurance company due to your behavior or possibly things out of your control — health — you will pay more in premiums since the company deems you as being at a higher risk of experiencing a loss,” he said.
Instead of purchasing long-term care insurance, you’d be gambling that you will not need long-term care.
If you don’t buy life insurance, the gamble would be that the surviving spouse and heirs will have sufficient assets in the event one spouse passes, Shah said.
“If they lose this bet, they have enough assets — investments, real estate, business assets — to pay for something like nursing home care, or a surviving family member’s expenses,” Shah said. “It favors them, because if they are fortunate enough not to experience an event that requires long-term care, they did not pay out any premiums for unused benefits and therefore, have further increased their net worth.”
But for most of us, well, we don’t have the cash to self-insure. Or we’re not willing to roll the dice and take that risk.
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