Is Self Insuring a Viable Insurance Strategy?
Is Self Insuring a Viable Insurance Strategy?
Over the years, several potential clients I sat down with to discuss insurance cover have bought up thequestion of self insuring. However, what is the practical aspect of self insuring?
Lets say you have a mortgage on your house. The average home mortgage in British Columbia, Canadais close to $300,000. If the principal breadwinner in the home dies, how will the mortgage be serviced let alone paid off without life insurance? IE: How can anyone but the wealthiest, self insure an amount of money this size? Simply put, you can't. With a large mortgage and no life / mortgage insurance in place, the only option is to sellyour home. If this is part of a family's financial plan and is considered by the family to be self-insuring, it isa very, very poor strategy. With the cost ofterm life insurance at an all time low, anyone who can afford the monthly payment on a $300,000 mortgage can afford $25 to $50 a month for enough life insurance to cover the mortgage payout.
The reality is; households across the country are more and more indebted. The average debt per household rose to $96,100 in Canada inthe third quarter of last year, with consumer and mortgage debt levels at record highs, arecent study indicated. That put the debt-to-income ratio at 145 per cent the highest level since an annual study began 11 years ago. How can a family today, with the amount of household debt that has built up, self insure? Impossible.
Then, take the issue of self insuring against a serious illness or an accident. If you are working for the government or a medium to large corporation, and have a good health plan cover that includes short term and long term disability coverage, you have a better chance of surviving a disabilityfinancially that those without a plan. However, if you are self employed or working for a company with no disability coverage, you would have had to save up sufficient money's to cover your expenses for approximately 6 - 9 months, the average time off work if you are off work due to illness or accident for more than 30 days. Using $3,500 as a monthly benefit, you would have to have saved $25,000 to $35,000 in an emergency savings fund. The big question is; how long would it take to save this money? And what would you do if you were disabled during the saving period? Nobody has a crystal ball. Nobody knows when an accident is going to occur or whena disabling illness will happen.
And, how can you self insure in the case of critical illness? A CI policy covers you for around 25 ailments, all the biggies so to speak. A reasonable amount of CI would be $100,000. This benefit is paid out on the 31st day after the medical condition is diagnosed, supposing you would have survived 30 days. If you think saving $25,000 to $35,000 in today's economy is difficult, try saving $100,000.
Therefore, the question; is self insuring viable? In today's financial climate for the average person the answer is NO! Please see http://www.thebusinessofinsurance.blogspot.com
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