Insurance is a necessary part of life for most people.

To cover yourself and your dependents, youll need health andauto insurance, as well as optionallife insurance.

All of that insurance comes at a cost.

A man in a bunny suit does a head stand on the top of a building’s roof.

Youll pay monthly premiums, and if you have a claim, youll owe a deductible.

That deductible is typically hundreds of dollars.

The lower the deductible, the higher your premiums.

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Some choose to self-insure, putting the money aside rather than paying premiums.

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What Is Self-Insurance?

Instead of paying premiums to an insurance carrier, you set the money aside for a rainy day.

Both businesses and individuals self-insure, although often its reserved for those who have substantial financial assets.

It means that they retain the responsibility for paying any claims or losses.

Self-insured employers pay claims for sick and injured workers out of company revenue.

Most self-insured employers like that they can skip some taxes and regulations related to going through an insurance provider.

Not all businesses benefit from being self-insured employers, though.

Even then, employers should decide whether being a self-insured employer is risky.

You may end up with multiple ill and injured workers at once, dramatically cutting into your company revenue.

That means its important to look at the pros and cons of becoming self-insured.

Here are some good reasons to consider it.

That means hundreds of dollars stay in your bank account.

The benefit of improved cash flow by not paying insurance premiums is only temporary, Roman said.

This advantage lasts only until a significant risk manifests as a financial loss.

When interest rates are high, that money can grow.

But keep in mind that when interest rates drop, your savings wont fare as well.

Youll Avoid Rising Premiums

Insurance premiums can increase at any time.

In fact, your insurance carrier likely boosts them up a little at the end of each year.

The average family health care premium has increased 22% since 2018 and 7% in 2023.

That doesnt even include your auto, home and life insurance increases.

This is especially relevant if you run a business that employs thousands of workers.

Even the smallest rise in premiums can add up over multiple plans.

If you should probably wrangle your budget, it may be time to consider a savings challenge.

Cons of Self-Insurance

As a self-insurer, you will face a few challenges.

Here are some pitfalls of becoming self-insured.

You May Skip Preventive Care

Skipping an insurance carrier for health care comes with one particularly tricky risk.

For businesses that have filed a legally authorized business form as self-insurers, things get even more complicated.

Self-insurers have to build in ways to ensure employees have affordable wellness care.

Severe illnesses will cost you more in a few years than paying for preventive care now.

With health insurance, this is called an out-of-pocket maximum.

One surgery can land you a five-figure hospital bill.

When youre self-insured, thats an expense youll have to bear yourself.

Managing Insurance Savings Takes Work

A self-insurer takes on the responsibility of managing all those funds.

Are you prepared to put the money aside?

4. Business Self-Insurers Face Accountability

Group self-insurers face their own set of challenges.

Private employers need to account for the funds they set aside for insurance purposes when tax time rolls around.

You may have to present independently audited financial statements on demand.

Before opting to be self-insured, look into local regulations.

There are ways to reduce costs while still using an insurance carrier.

High-Deductible Plans

When you choose an insurance plan, youre asked to pick a deductible.

The higher the deductible, the lower your premiums will typically be.

Set a high deductible, then work toward saving the full amount of that deductible.

If your employer doesnt offer it, check with your bank or a private provider.

Those who are aged 55 or older can save an additional $1,000 in catch-up contributions.

Pick and Choose

Insurance doesnt have to be an all-or-nothing proposition.

Consider your unique financial risks to determine which to transfer and how large your emergency savings should be.

Becoming a self-insurer comes with some risks.

But you dont want to pay for excess insurance either.

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Stephanie Faris is a professional finance writer with more than a decade of experience.