Self-insurance

In a personal finance context, self-insurance is defined as "setting aside your own money to pay for a possible loss instead of purchasing insurance and expecting an insurance company to reimburse you."

In general, it is strongly recommended to protect yourself against large, infrequent losses with third party insurance. Some third party coverage is even required by law, such as minimum amounts of auto insurance. But you can choose to self-insure against small infrequent losses, or perhaps even against moderate size, infrequent events, if you have the financial resources.

What risks could you self-ensure?
The following table (inspired by ) shows the right sorts of risks and events to consider covering with self-insurance:

How to do it
Using self-insurance saves you from paying unneeded insurance premiums. Instead, if your financial situation is in good order, you can choose to self-insure for certain risks.

Increasing your deductibles
Selecting higher deductibles on third party insurance such as home and auto is a classic form of self-insurance. Milevsky reports that for home insurance, "the difference between covering the first $500 of damage (the standard deductible on home insurance) and the first $5,000 in damage can be up to half of the usual premium."

The Small Risk Fund
To be ready to pay for small infrequent losses, you may want to accumulate money in a dedicated self-insurance account. More specifically, you would deposit the premiums you are not paying to insurance companies anymore (or the reduction in premiums you got when you increased your deductibles) in a dedicated high-interest savings account (HISA); Milevsky calls this the "Small Risk Fund". Obviously, this fund would be used only to cover small infrequent losses, not to upgrade to a larger TV or to replace your roof.

When the pool of accumulated money in your Small Risk Fund gets large enough, you could stop contributing to it until a "claim" depletes it. If a medium-sized infrequent loss occurs, for which you have chosen to self-insure, and your Small Risk Fund can't entirely cover it, your emergency fund could be used as a temporary back-up.