Auto Insurance, Homeowners Insurance, and Medical Insurance – Save Money by Self Insuring with a Higher Deductible

Saving Money Through Higher Deductibles

Have you saved up enough money for an emergency fund?  Have a liquid investment account that you could tap if you needed a couple grand? Consider saving yourself money by choosing a higher deductible automobile or homeowners policy and lowering your premium.  I would argue for most people that can stomach the idea of a higher deductible, they will realize true savings over their lifetime.  The same principles apply to business owners and self employed people when deciding their health plan.

I prefer to call the concept “self insuring”.  By selecting a higher deductible (amount you have to pay out if their is at at fault claim), you save money on your premium every year.  However, should you need to make a claim, you will have to pay more out of pocket for the repair.  In general, you need to be making claims every 2-3 years in order for the lower deductible to be a better deal.  Further, if you are making claims that often and they are relatively minor claims (backed into a pole at the super market), your premium rates are likely increasing because of the claims.

By taking the risk of the first $1k or $2k in out of pocket claims (deductible) vs the typical $500,  you will likely save a decent amount of money over the long haul.  So for that extra $500 to $1,500 of risk, you are being compensated for taking the risk away from the insurance company.  The most important part of your insurance, which is protecting you against catastrophic loss that could impact your ability to reach your goals and retire, remains protected.

For those who have control of their medical insurance options,  the same principles apply to medical insurance, with a high deductible plan will save you in premiums as you are self-insuring the first few thousand of claims and in most years you will benefit from the savings.   You also retain disaster coverage as your insurance starts to pick up the bill after the deductible is reached and most of these plans have a max out of pocket clause.

So when you review your insurance coverage, consider the deductible vs the potential savings from a lower premium.

** Please note, I do not sell property and casualty insurance.  As part of my fee-only service, I provide property and casualty insurance reviews as part of their financial/investment plans to ensure my clients are properly and efficiently protected.

**Information in this post is for educational purposes, please contact us for specific advice on your individual situation to determine what is appropriate.