Self-Insurance: A Guide to Protecting Your Business Finances

Self-insurance is a method that some businesses and individuals use in order to avoid paying money to an insurance company. With this method, the business or person will set aside enough money to cover a loss if it occurs instead of paying premiums to an insurance company. Then, if a loss occurs, they will use the money to pay for the loss. If you are considering a self-insurance strategy, here are a few tips to keep in mind.

1. Evaluate All Potential Losses

One of the most important parts of the process of self insurance is determining how much money you could lose. When you are going to insure a specific kind of loss, you need to know exactly how much money the loss could create. For example, if you wanted to insure a specific piece of property, you need to first find out exactly how much it would cost to replace that property if it was destroyed. This process may not be as simple as determining the value of a piece of property. For example, if you are looking at health insurance, you would need to consider all of the different variables that are involved in a standard claim. Health care bills can get very expensive and you need to make sure that you have enough money set aside.

2. Safe Investments

When you keep your own money for self-insurance, you have the ability to do what you want with it. You do not have to pay it to an insurance company and allow them to invest it. Even though you have this freedom, that does not necessarily mean that you should put the money into regular investments. The point of a self insurance program is to have the money there when you need it. This means that you should most likely not put it into stocks or mutual funds or anything else that could make you lose the money.

You might consider putting money into a high-yield savings account at a bank or into a CD. Both of these options will provide you with a small amount of interest on your money and FDIC insurance protection. Some people have made the mistake of putting their money into risky investments and it led to big problems.

3. Consider Stop Loss Insurance

Even though you will not have a regular insurance policy that covers all losses, you might want to think about purchasing a stop loss insurance policy. Stop loss insurance is designed to take over coverage after a certain amount of loss has been realized. This type of policy is handy because it limits the amount of money that you can be responsible for. For example, you might cover the first $50,000 worth of losses and then a stop loss policy can take over the rest. These policies are generally very affordable and they allow you to limit your liability as an insurer. They are a good value for what you can get out of them.