Hi Brian, I have been trying to figure it out but my Google skills are not as good as yours. Is it just as simple as putting $100K in an account named self-insurance for property? Would it be the same for vehicles or boats?
Bottom Line: Fun fact for you. What state has the highest number of mortgage free homes? Florida. Surprised? Many might be due to Florida’s above average price for homes, however Florida having the largest number of retirees, who most commonly don’t carry mortgages on their homes, contributes considerably to Florida leading the country with over 2.2 million mortgage-free homeowners. That means, independent of Florida’s property insurance crisis, which has more Floridians looking into the concept of self-insuring, there’s more opportunity to do it here compared to anywhere else. All in over 43% of homes in Florida are mortgage free. Which, as an aside, can also provide a bit of reassurance for Floridians who’re nervous about whatever comes next in our housing market. With so many homes that are paid for, there’s a rather solid floor in our housing market, especially when factoring in the unrelenting demand from those wishing to move here. So, about the self-insuring thing. The first key is that you’re one of the 2.2 million homeowners who don’t have a mortgage. If you hold a mortgage, the mortgage company will mandate that you carry insurance coverage to their minimum level of satisfaction. There isn’t an option to self-insure for mortgage holders. Incidentally, for those who can afford to pay off their homes but are holding mortgages for strategic reasons, it’s worth reevaluating every so often. Florida’s ever rising property insurance costs and dwindling options may have swung the value proposition in the other direction. The average property insurance policy in Florida is up over 40% over five years ago. Now, if your home is paid off and you’d like to self-insure...
There's a reason Warren Buffet has always loved the insurance business. It doesn't get a lot better than getting paid money upfront that you can invest and benefit from with the potential that you'll never have to payout any proceeds to the person paying you the premiums. The idea of self-insuring is to set up a similar system for yourself. I prefer to self-insure when and where you can. In other words, if you can afford the cost of a worst-case outcome from something that's insured, you probably shouldn't pay to insure it. So yes, I’m what about to explain would apply to other insurance products as well, however be mindful that there are legal requirements to maintain minimum coverage for vehicles.
To self-insure you need to financially be in a position where you have enough money that’s accessible to cover potential damages to your property in an emergency. For most homeowners, having professional guidance on what those costs would be is probably necessary. If you’re ending insurance coverage with an existing provider, you probably have a good idea based upon the coverage limits in the policy. From there the money needs to be saved/invested in an account that’s liquid, meaning you can access the funds as/if needed. For non-self-advised investors having an advisor to assist with this type of planning is probably a good idea. Here’s some additional perspective in addition to the view of the possible.
- The average American spends 12% of their gross earnings on insurance products
That means that the average household spends around $8,000 on insurance per year. If you were to invest that $8,000 annually at an average stock market rate of return of 10%, and you didn’t have any “claims” you needed to pay out, you’d have $512,000 in 20 years. That’s over a half-million in your pocket as opposed to insurance companies. No doubt it’s a risk to self-insure, however the value proposition even in risky South Florida most often would be to your benefit. As major Florida insurers are rebalancing it might be food for thought for you to rethink the way you do things too.
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
Gettr, Parler & Twitter: @brianmuddradio
iHeartRadio: Use the Talkback feature – the microphone button on our station’s page in the iHeart app.
Document: Getty Images