The Risks and Reality of Self-Insuring Your Car
Some drivers may see self insurance as a way to save on their auto bills, but it is risky and could lead to financial trouble.
Auto insurance is required in almost every state, which means most drivers have to choose an auto insurance policy that works within their budget. Even good credit and a clean record don't erase premiums — annual insurance premiums cost drivers in the United States more than $1,100 per vehicle on average according to the National Association of Insurance Commissioners.
For car owners looking for alternatives to costly auto insurance coverage, self insurance may seem like a way to save money on premiums, especially with an accident-free driving history. However, drivers who choose self-insurance car coverage could face the responsibility of handling steep repair costs, medical expenses, and possible legal payouts that can occur after an auto accident.
What Is Self-Insured Car Insurance?
Self insurance is an auto insurance coverage option considered by some car owners who want to save on their monthly insurance costs. Instead of paying an insurance company to protect them and their vehicle in case of an accident, these drivers would instead pay all related costs in the event of an accident instead of paying a monthly premium.
Owners who decide to self-insure their car are held responsible for all costs associated with any accidents, damage, theft, or other common insurance issues. Drivers would then avoid paying costly insurance premiums. This could be especially beneficial if they never have to file a claim. However, self-insurance car coverage typically requires an upfront outlay of money — often a sizable one.
To qualify for self insurance, drivers will need to provide a cash deposit or surety bond to their state's motor vehicle department or department of insurance. This amount varies by state and can be more than $150,000. Additionally, drivers need to live in a state that allows them to self insure a vehicle, since the arrangement is not universally allowed.
Why Self-Insurance Car Coverage Is Risky
Drivers who have never faced an insurance claim or who own a vehicle that costs more to insure than it would to pay out of pocket for repairs, may see self insurance as a viable option. Choosing self insurance is a risky decision because it transfers the risk from a traditional insurance company to the vehicle's owner. This can lead to financial hardship if a self-insured driver is involved in an accident.
Consider the difference of that risk to an individual, compared with the risk an insurance company takes on. In both situations, the financially responsible entity is hoping that the cost of claims doesn't exceed the amount they can pay for.
For an insurance company, the probability that enough people have accidents at one time to bankrupt the company is unlikely. For someone who is self insured, driving is like taking a large portion of your assets to a casino and gambling with it every day. You may get on a hot streak, but at some point you're likely to lose.
The upside is not paying a single vehicle's insurance premium. The possible downside is financial hardship.
In addition to paying for their own car damage and medical expenses, if a self-insured driver is found at fault, they may be liable, and have to pay, for any damage, injury or other legal fees for the other driver.
Drivers with self insurance also may not qualify for certain auto loans or leases, even if they live in a state that allows it. Lenders will likely require you to retain full coverage insurance for the life of the loan or lease.
Most States Do Not Allow Self Insurance
Not all states offer self insurance as an option to drivers, and each that does make it optional has its own rules and regulations. Some states only allow drivers to elect for self-insurance car coverage if they're insuring multiple vehicles, with some requiring coverage for 25 vehicles or more.
There are some states that allow drivers to obtain a self-insurance certificate without a large fleet of vehicles. State rules vary widely on self insurance, so be sure to check with your state's motor vehicles division before attempting to switch.
It's important for drivers to double-check their eligibility before canceling their current coverage, as canceling before you check could leave you uninsured and vulnerable in case of an accident. After confirming that their state allows self insurance, drivers should check to see if the deposit required by their state fits within their budgetary expectations.
Alternative Ways to Save on Insurance Costs
There are likely less risky ways to save money on insurance costs. For example, choosing a higher insurance deductible may help lower monthly costs without sacrificing coverage in the event of a major incident. Drivers without a history of claims may consider trying usage-based coverage as well to stay protected without unwanted costs.