Be Your Own Insurance Company

Understand Risk

This past weekend was a very busy one at the Root of Good household.  We were hosting play dates, lunches, and dinners for a few friends at our house throughout the weekend.  Add to that a birthday party on Sunday at a nature preserve (with hiking after the cake-eating), and watching fireworks at the State Fair.

The weekend started early on Friday.  Around lunch time the kids were released from school around noon so their teachers can participate in a half day of intensive training on new instructional methods and techniques.  I call B.S.  I really think it was a pretext and all the teachers sat around commiserating with each other while taking tequila shots and singing drunken karaoke over the intercom.  That’s what I would do if I were a teacher, which partially explains why I’m not a teacher.

After school, I walked home with my two daughters as well as about 10 other elementary school kids who belonged to an assortment of other parents.  Two of those 10 other kids were headed to our house (along with my two daughters) for an afternoon play date.  The other 8?  They went to their respective houses without anyone running them over or abducting them in a big creepy white work van.

Some might argue that the parents of those eight other children are guilty of child abuse.  If I were those allegedly negligent parents’ criminal defense attorney, I would argue they are actually very astute statisticians who know how to ignore the media hype over child abductions by strangers (a little more info on avoiding media hype here).  The best statistic I could find was in this eleven year old report that says there were around 115 children kidnapped by strangers in 1999.  For reference, there were 72,000,000 children in the US in 1999.  In other words, 99.99984% of children walking home from school made it home just fine.  Put another way, for every abducted kid, there are 626,086 other kids that are completely safe from getting kidnapped by strangers.  They will live another year to take their shot at the “abduction lottery” the next year.  As my kids say, “Stranger Danger!”.

The odds are so firmly stacked in favor of NOT getting abducted, that parents could arguably be called negligent for NOT allowing their kids to enjoy the outdoors and get some much needed exercise while walking home from school with their friends.  But I don’t want to judge, since I almost always walk with my kids to and from school.

To put the risk of a kid being abducted into perspective, it is roughly as likely to happen as it is to die in a car crash over the long Thanksgiving holiday weekend.  The odds of dying in a car crash over Thanksgiving are 1 out of 697,917 (for a period of 5 days), just slightly less likely than being abducted by a stranger (1 out of 626,087 over the course of an entire year).

Feeling Lucky

Would anyone really be deterred from visiting grandma’s for her delicious turkey, stuffing, and gravy over a piddly 1 out of 697,917 chance of dying on the trip?  Of course not!  We all take risks every day, even when there are serious consequences due to our choices.  The odds of a negative outcome may be tiny, but the result of a negative outcome can be fatal.  In spite of the known dangers, we willingly take on risks.

I don’t have reams of annual statistics on child abductions over the last half century, but I would imagine that child abduction rates have remained relatively constant or even declined over the decades.  There were crazy, messed up, despicable, sick people in the 60’s, the 70’s, the 80’s, the 90’s, the 2000’s, and today.  There were no good old days of 100% safety and security, just the good old days when TV’s only had 3 stations and they were in black and white.  You didn’t hear about child abductions because they were so rare.  Today we have 24-7 news cycles and internet headlines and facebook newsfeeds to keep us informed of the 0.00016% of children that are abducted every year.  Rapidly evolving technologies accelerate the rate of information dissemination.  Bad people doing bad things haven’t changed their ways.

Mr. Money Mustache (a fellow blogger) talks a bit about how much we focus on the risk of something really bad happening, when in reality the odds of that bad event occurring are nearly zero.  It’s a good read and helps put things in the right perspective.  I would call Mr. Money Mustache and myself an optimist, but I think we are both just slightly above average at math and statistics.

 

Analyze Risk

Thinking critically about risk and putting particular risks in perspective can help you navigate every day life.  The insurance industry exists to help people and businesses manage risk.  It’s a trillion dollar industry in the US alone, and employs over 2 million people.  This also means there are huge amounts of money being spent on insurance company operations, overhead and profit.

Why such a large insurance industry?  People don’t like risk.  The unpredictable nature of random events bugs us.  Insurance steps in to spread the risk to a large number of people.  If you are insured against a particular risk, you share that risk with all the other insureds, so your risk of significant loss is limited.

Many of us have experience with life insurance, health insurance, auto insurance, and home or renter’s insurance.  The truth is that insurance is offered all over the place:

  • extended warranties on electronics and appliances
  • travel insurance
  • vacation rental insurance
  • Roadside assistance

With the major types of insurance like home, auto, and health insurance, the Root of Good household tries to keep our premiums as low as possible by having a high deductible and only covering risks we want to protect against.

For health insurance, a high deductible plan has served us well during most years.  We did switch to more comprehensive coverage for a few years to save us money on the delivery of our children.  I’m not worried about a $100 doctor’s visit or a small $1,000-2,000 procedure.  I’m worried about a catastrophic medical emergency that could cost tens or hundreds of thousands of dollars.  I really consider health insurance to be asset insurance, since a major medical issue probably wouldn’t bankrupt us, but it would seriously deplete our assets.

For auto insurance, we also kept the deductible high.  A $1,000 deductible isn’t a problem when you have plenty of money in the bank to cover unexpected expenses.  Insurance acts as a forced savings account for many.  Instead of handing over more money to the insurance company each year to cover insurance we don’t need, we just pocket the savings.  We also got rid of the comprehensive and collision coverage once the cars weren’t worth that much ($3,000-$4,000 value seems like a good level).  If one of our cars were stolen, vandalized, or destroyed, a $3,000 hit to our net worth isn’t that severe.  We would just buy a new(er) car or get our busted up car fixed.

On our home policy, we set the deductible at $2,500.  In ten years owning our current home, we have not filed a single claim.  We look at home insurance as something that would be used primarily in the case of major catastrophes.  If our house burned to the ground or we suffered a direct hit from a tornado, the insurance would come in handy.  If a thunderstorm knocks a few shingles loose, we aren’t filing a claim.

Extended warranties seem to provide peace of mind.  At a steep cost.  I took a quick peek at the bestbuy.com website to see the going rate for “peace of mind” these days.  I found a nice 50″ TV similar to the one we bought a few years ago.  The extended warranty for a 50″ TV is 18% of the purchase price if you opt for two years of protection.  For a five year extended warranty, you will pay 31% of the TV’s purchase price.  Do 31% of TV’s really die within 5 years?  We haven’t experienced failures this frequently, and we usually buy just about the cheapest tech toys we can find!

We occasionally rent a house at the beach for family vacations.  They always offer “vacation rental insurance” to cover your rental costs in the event of family illness or death, or in the event of a hurricane or tropical storm (they infrequently hit the east coast of the USA).  Without doing any research or analysis, it seems like a good deal to pay an extra 7% of your rental cost for this valuable insurance.  But it isn’t that simple.

The extended warranties and vacation rental insurance contracts are worded very carefully against the consumer.  Pick up one of these contracts some time and dig through the fine print (because that sounds like so much freaking fun!).

The Best Buy extended warranty contract says you may have to pay a diagnostic fee to the technician to determine whether the repair falls under the terms of the extended warranty.  They will refund the diagnostic fee if the problem is under the warranty.  Otherwise you’ll have a busted TV and a bill for $100.  I can’t think of a time when any extended warranties would have worked in our favor.  Eventually something of ours will die just outside the manufacturer’s warranty, and we will be on the hook for repair or replacement.

Vacation rental insurance wouldn't have helped us avoid this tropical storm. I'm glad we didn't waste money on it!

Vacation rental insurance wouldn’t have helped us avoid this tropical storm. I’m glad we didn’t waste money on it!

On the vacation rental insurance contract, “illness” and “death in the family” are defined very narrowly to make it difficult to use the insurance policy.  Hurricanes only trigger the insurance coverage if your rental house is under a mandatory evacuation for at least four days during your seven day stay.

Situations where the insurance pays you nothing: A mandatory evacuation lasting less than four days.  A mandatory evacuation of a few days at the beginning of your stay or a few days at the end of your stay. Merely a voluntary evacuation (not mandatory), and a hurricane or tropical storm makes landfall a few hundred miles away and makes the ocean extremely turbulent and dangerous, floods the roads near your house, and you lose power to your house for half the stay.  Those scenarios are more likely than the only scenario actually covered by the insurance (four day mandatory evacuation).

In other words, the insurance is almost useless to protect you against the biggest risk you face – loss of use of the rental house when a big tropical system makes life on the coast really crappy.  In all our years of renting houses at the beach, we have never experienced a situation even close to triggering the terms of the vacation rental insurance policy.

 

Embrace Risk, Self Insure

We embrace risk by self insuring for small risks that we can absorb without significantly impacting our finances.  By self insuring all of our small risks, we save a huge amount of money on reduced or avoided insurance premiums.  Occasionally we have slightly higher out of pocket costs to cover an incident, but it all averages out in our favor over time.

Here is roughly what we save each year by keeping deductibles high and forgoing various types of consumer insurance:

Health insurance: $2,000

Home insurance: $400

Auto insurance: $200

Extended warranties: $250

Vacation Rental Insurance: $100

Roadside assistance: $50          

TOTAL: $3,000

Understanding risk can save you a bunch of money.  The past decade of buying too much insurance would have cost us $30,000.  We have definitely paid out of pocket for a few things over the years that we could have insured against, but nowhere near $30,000 (probably $3,000).  Most of that $30,000 is sitting in our investment accounts and is probably closer to $40,000 or $45,000 since amounts saved ten years ago have more than doubled in the last decade.

Some might be reading all this and think “yeah, but Root of Good is rich and we aren’t.  We can’t afford to pay a thousand or two out of pocket if something really bad happens.”  You can’t afford not to self insure.  Save a few thousand extra dollars in your savings account and call it “self insurance money”, “rainy day fund”, or some other useful name.  Then you can save thousands of dollars every year by right-sizing your insurance purchases.

 

Closing Thoughts

My philosophy on insurance is that it should cover catastrophic risks primarily.  We do pay extra for higher coverage amounts for liability insurance on the home and auto policies.  The additional coverage is incredibly cheap (around $100-200 per year for hundreds of thousands of dollars of additional liability insurance).  I strongly hope it will continue being a complete waste of money while protecting us against the exact kind of risks that would destroy our assets and would cause a major change in lifestyle for us.

To save money by self insuring, you have to be mentally okay with losing out occasionally when bad stuff happens.  Imagine paying $500 for a new TV or computer and having the device die the day after the manufacturer’s warranty expires.  You face a $200 repair bill (but you avoided an $80 extended warranty).  Does it feel okay losing $120 (the net cost after discounting the extended warranty price)?  If not, you should keep wasting money on insurance since it buys you peace of mind.

 

 

Readers, do you think you have just the right amount of insurance, or are there areas where you need more or less?

 

25 comments

  • Speaking of TV’s, Santa Claus bought us a TV for Christmas a couple of years ago at what seemed like a great price for the size of the set ($300). 3 months to the day after Christmas, the thing died. Dead, stone cold…… After spending a bunch of time online finding out where the local service centre is, we took it in to be repaired on warranty. 6 (!) weeks later we got it back with a new Mother board installed. Last month (14 months later) the same thing happened only this time it’s us who had to pay – $180. So now this is a $480 TV plus 2 special trips to the service centre. The crazy thing is, we only watch netflix and dvd movies on it – no cable nor over the air signal here – so that usually means about 2-3 hours of viewing on average per week (much less during the summer). Next time, I dunno…..

    Please go easy on teachers. They are not the ones who create the school schedule including pedagogical days – that is decided by administrators, many of whom have not seen the inside of a classroom in many years, if ever. I challenge anybody to stand up in front of a group of 23 4th-graders for 6 hours a day, 5 days a week, and say that it is an easy gig. These people are trained professionals who are dedicated to nurturing the next generation. As with any profession, you will have a few who will not be up to everybody’s expectation, but please be careful with generalizations, after all, even finance blogs include a few that aren’t worth reading….!

    • Sometimes more devices = more headaches to maintain them.

      As for the teachers comment, I clearly failed at my attempt at comedy! Although many of the teachers would love to take tequila shots and sing over the intercom, I don’t really think they are doing that on Friday afternoons. At least not before 5 pm and not at school. 🙂 Most work their 8 hours/day and then some, and all the ones I have dealt with at my children’s school are excellent (and low paid – probably $35,000-$40,000 max for the mostly young teachers). It’s definitely a lot of work, and I’m glad they are there. I don’t think I could teach them any better by homeschooling them, since the teachers are well educated in the latest methods of teaching (unlike me!).

  • I do this all the time, we have the highest deductibles we can get on our home and car insurances. And I want my kid to be able to walk home from school alone (at a reasonable age), but there’s a very real risk of being accused of neglecting a child because we weren’t with her every second of every day. Unfortunately, even when you know that the risks are extremely low, you still have to do the thing you’d rather not because of a different risk – other people’s stupidity…. 🙁

    • That’s great to keep your deductibles high. I forgot to mention in the article, but when you self insure for a big deductible, you are more likely to be careful about things (to save yourself money).

      I hear you on being accused of child neglect. I think we all are stuck doing some things not because they are right, but because other people might misunderstand our actions.

  • Green Money Stream

    I agree with your philosophy regarding insurance. We also keep our deductibles high, since it won’t break the bank for us if we have to cover the deductible. Unfortunately, with so many people who don’t even have $1000 in the bank, they get stuck paying more for insurance with lower deductibles.

    And I enjoyed the teacher comment. 🙂

    • Being broke all the time. There’s a hidden tax to being broke. You can’t self insure for the first few thousand of deductibles.

      Glad you liked the teacher comment. I thought about my teacher quote earlier today when I was in the grocery store. I bumped into our school’s principal as he was checking out with a cart full of party supplies (sodas, chips, cups, plates, etc). Another Friday afternoon “early release day” today. I didn’t notice any margarita mix in the cart. So maybe they are partying but not with alcoholic bevs.

  • Another one that’s always baffled me is that people will often commute 10+ miles between home and work because they work in an “unsafe neighborhood”, yet, an objective analysis would conclude that you are SAFER near work once you account for the risk of death or serious injury in a car crash!

    • Most definitely. Add to that the wasted life spent commuting extra distance. +20 minutes 1 way = 160 hours per year wasted commuting. That’s the equivalent of 4 full work weeks of leisure time. But people seriously give up that much time and pay up for way more expensive housing just to have a feeling of safety.

      Hey, it keeps the houses near me affordable, so hopefully my kids can buy a house here on day!

  • My fiance and I recently purchased term life insurance. I’ve looked over many of the ER websites, and it seems like those who are retired early do not have life insurance. This makes sense to me because their significant other or children will be fine if one or both parents die. However, for those of us who have not reached that level yet, it seems up for debate. For us, it was a decision of what we were giving up by paying the annual premiums over the term vs. what we would receive if one or both of us were to die. What we decided was that the peace of mind of having this back up was worth more than the amount of money we are potentially losing out on in the long run.

    From those who are now retired, early or not, did you have life insurance while you were building your assets? If so, what was your reasoning? Did you cancel it upon reaching retirement?

    • We had some minor coverage (2-3x our annual salary) provided free through work. Otherwise, we didn’t carry life insurance.

      Our rationale was:
      -We didn’t need it when we first got married. Either one of us earned enough to get by just fine. We didn’t have any kids so there was no one to support.
      -After a few years we had kids. By that time, we were eligible for Social Security Survivor’s benefits for our kids. I don’t remember the exact amount, but it was substantial. $30,000 to $40,000 per year until the kids grew up. That plus our growing investment portfolio would be more than enough to provide for the surviving spouse and kids indefinitely. That’s why we didn’t need any supplemental life insurance.

      • Thanks for the reply, Justin.

        How can you find out more about SS survivor benefits? We don’t have kids yet, but that will be helpful to know going forward.

        • I’d start here: http://www.ssa.gov/pgm/survivors.htm

          They have lots of info on the survivor’s benefit.

          I found out about the SS survivor benefit from reading my SS statement. They used to mail these out to everyone, but a few years ago they switched to mailing them only to older people (over 50??). My statement told exactly what I would qualify for based on number of kids. You can request a statement from the SSA and it should have the correct SS survivor’s payment you would qualify for (if you had kids).

  • 10 years ago there was no doubt we were over insured car-wise and after an hour of wrangling with my agent about deductibles we saved about 3k a year on 4 cars. In some states you can COMPLETELY self insure your car by putting up a bond for approx 30k in lieu of car insurance. I’m not sure if this is possible in every state but I know it was in Calif. While I like the idea in theory, it’s a little frightening to put your net worth at risk. Still I’m fascinated that, in theory, you can actually be your own car insurance company.

    Generally we don’t buy extra consumer warranties on anything, but occasionally if we get say a laptop on sale for a ridiculously low price, we might buy a 2 or 3 year warranty with the rationalization that even with the extra cost it’s still lower than the actual retail or even wholesale price of that item. That worked for us when our daughter’s laptop punked out while at college and the warranty got her a new PC no questions asked. Well worth the extra $50 bucks.

  • You appear vastly underinsured. No LTCI? I’m no expert but with assets well over 1 mill you are a prime target for liability lawsuits. Time to consider full coverage and a 2 million dollar blanket policy? Think of it as asset insurance my friend.

    • We have pretty high limits on auto and home liability coverage. Not $2M but a lot. Most of our assets are judgment proof (in 401ks and IRAs) so we wouldn’t exactly be destitute if “the big one” struck us. And we would probably deplete our non-protected assets fighting the frivolous lawsuit anyway, so there wouldn’t be anything left to satisfy a judgment. 🙂

      As for LTCI, I’ve heard mostly negative stuff about it. Not a great deal for what it covers, and the inflation protection may not be adequate for whatever we need in many decades. LTCI is something we might look at eventually but not right now. We could self insure for quite a while, or find a cheaper way of getting similar care (in home care?).

  • Great article! I’d be interested in hearing your thoughts on umbrella insurance. Do you buy umbrella insurance to protect your net worth?

    • Yes, just to cover our net worth. It was $162/yr for an extra million dollars worth of coverage plus a small additional amount to increase our auto liability to qualify for the umbrella.

      My basic philosophy on insurance is that it should protect you from catastrophic losses, not routine, ordinary small losses. By skipping comprehensive and collision on our cars (worth only a couple thousand dollars each), we can transfer those savings to pay for $1 million of umbrella policy. The occasional loss of a couple thousand dollars if we totaled a car or it was stolen would be a complete non event whereas a large lawsuit could significantly impact our long term retirement plans.

      • This is what I was looking for! Thanks Jason/Justin.

        When calculating net worth for a umbrella policy I should not include primary assets correct? (Primary residence/cars)

        Also Justin have you updated your policy as your net worth changed?

        • Net worth is only one consideration for determining your umbrella policy because you’re trying to protect all your assets. And you might want more than your net worth in coverage because you could face large judgments of several million dollars, so a policy of a million dollars, for example, won’t be enough. It also depends on state law – some states make your principal residence free from judgment (Florida??).

          I haven’t changed my umbrella policy since first acquiring it shortly after FIRE. Between it and high limits on my home and auto I have $1.5-2 million of coverage, which should be adequate for most situations (and most of my net worth is in 401k/IRA assets that are free from judgments that stem from a lawsuit).

          • Where did you get your umbrella policy? Ours requires us to keep lower deductibles and a certain level of insurance on our cars and home–it sounds like yours doesn’t have the same requirements given the low premiums listed in your annual budget. I’d be interested in shopping around, but haven’t found anything different from what we have.

            • I think ours required certain minimum coverage levels (like $100k+ or $300k+ for auto). We upped the limits to $500k auto and $1,000,000 home, just because increasing the limits from lower levels was stupid cheap – like $6 per year or something. I don’t recall them saying anything about the deductibles. It shouldn’t matter at all what deductibles you have because the company is on the hook for a million bucks (or more) and they probably won’t care if you pay the first $100 or $500 or $2500 of damages.

              We have our policy with Farm Bureau – a mutual insurance company. Rates dropped in 2017’s renewal to $108 for the whole year for a million dollars worth of coverage.

  • Jeremy Mingledorff

    Great stuff! As a general rule, what net worth value should umbrella insurance be purchased? $1,000,000 ?

    • If you’re asking how much coverage do you need, that’s a matter for how much risk you want. Covering $1-2 million seems prudent as it would cover the vast majority of lawsuits (and stacks on top of home/auto liability coverage).

      If you’re asking at what level of net worth do you need to consider umbrella coverage, I’d say once you get into the several hundreds of thousands of dollars.

      • Jeemy Mingledorff

        I was asking at what net worth- Thank You for that answer!
        Love reading your stuff man and Congratulations for breaking the old school ways! This coming from a baby boomer. 😀

Leave a Reply

Your email address will not be published. Required fields are marked *