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Buying insurance is about mitigating risk. But in most states, car insurance isn’t just a good idea, it’s a requirement to register your car.
If your state allows you to self-insure, you may have the option to break ties with your insurance carrier, or at least greatly reduce your premiums. Understanding the risks and costs of self-insurance can help you make an informed decision on the coverage or lack of coverage you need.
If you choose to fully self-insure your car, you take on all of the financial burden after an at-fault accident. You mitigate those risks by having the reserve cash to pay for any damages done to your property or damages you cause to others. Your cash reserve is typically in the form of a bond or deposit made to your state’s DMV that proves your ability to pay.
But self-insurance doesn’t have to be an all-or-nothing choice.
The risks of owning and driving a car vary widely. Insurance companies offer many levels of insurance so that drivers can choose what kind of coverage they want. In a sense, anyone who isn’t fully insured is engaging in the form of self-insurance.
For example, choosing not to add comprehensive insurance to your policy means that you’ll pay out-of-pocket for any theft or hail damage done to your car. That’s self-insured comprehensive coverage.
The differences between car insurance and self-insurance:
Typically, states that allow self-insurance require you to prove you have cash reserves equal to the amount of liability the state requires you to carry in insurance. If your state’s liability requirement is $50,000, which is the average, you have to either deposit those funds with the state or post a bond so that the money is available to cover damages. So while you may not pay a monthly premium, you’re still paying for liability coverage.
A few states will allow individuals to pay the deposit using a surety bond, which allows you to pay smaller payments over time rather than come up with a lump sum to post a bond, but you can be charged up to 5% over the value of the bond.
Take into account the risks and costs associated with self-insurance and weigh those factors against finding a cheap car insurance policy. You may decide it’s easier and more affordable to shop around for cheap car insurance that can cover you without all the hassle of being self-insured.
Three states in the US offer lessened insurance requirements or exemptions:
Some states only allow self-insurance for companies with fleets of vehicles and the cash reserves to pay. Others allow individuals to self-insure as long as they can deposit money or secure a bond to cover any liability costs.
To self-insure, you typically need to pay your DMV by cash, surety bond or letter of credit.
State | Deposit amount |
---|---|
Alabama | $50,000 |
Arizona | $40,000 |
California | $35,000 |
Colorado | $35,000 |
Delaware | $40,000 |
Idaho | $50,000 |
Indiana | $40,000 |
Iowa | $55,000 |
Louisiana | $55,000 |
Maine | $127,000 |
Maryland | $75,000 |
Massachusetts | $10,000 |
Mississippi | $15,000 |
Missouri | $60,000 |
Montana | $55,000 |
Nebraska | $75,000 |
New Mexico | $60,000 |
New York | $25,000 |
North Carolina | $85,000 |
Ohio | $30,000 |
Oklahoma | $75,000 |
Rhode Island | $75,000 |
South Carolina | $35,000 |
South Dakota | $25,000, or $30,000 in securities |
Tennessee | $60,000 |
Texas | $55,000 |
Utah | $160,000 |
Vermont | $115,000 |
Virginia | $50,000 |
Washington | $60,000 |
Wisconsin | $60,000 |
Wyoming | $25,000 |
Self-insurance isn’t for everybody, but there are a few situations where it might be beneficial to take on the risks yourself.
Without the backing of an insurance company, you are left to mediate all liability issues and risks related to your car-related mishaps. The following are some drawbacks to keep in mind while you consider self-insurance:
If you’re in an accident that is your fault, or if the person at fault is uninsured or underinsured, you are responsible for your repairs and medical bills. If you are sued for damages, you are responsible for legal fees and any judgments or settlement costs.
What you’ll pay in damage depends on the accident and the level of injury to the people involved. According to the National Security Council’s 2018 analysis, the average cost of an auto accident can be as little as $4,500 for mere property damage and as much as $1.6 million dollars if the accident involves a fatality.
If you provided a surety bond to cover your liability requirement to the state, the bond pays the damages up to the limit of the bond. But, you’ll be expected to pay all of it back, if you hadn’t paid off the bond before the accident.
Afterward, you won’t be able to continue self-insuring until you’ve paid a new liability deposit or secured an additional bond. You are directly responsible for any damages that exceed the amount of your liability deposit or posted bond.
Self-insurance can take several forms, depending on your financial standing. Whether you fully self-insure from your own wealth, obtain a surety bond or create a reserve fund of a certain amount, you can reap the following benefits:
One way to lower your insurance premium is to increase the size of your deductible. But every time you do this, you’re basically self-insuring up to the amount of your deductible. If you have a reserve fund for this purpose, increasing your deductible to the size of your fund can be a way to greatly decrease your insurance rates.
Self-insurance gives you the opportunity to buy only the absolute minimum coverage. Or, if your state allows it, you can go one step further by posting a surety bond or deposit with the state to eliminate your auto insurance altogether.
If you have good credit, the premiums you pay on your bond can be much less than what you would pay for traditional auto insurance. You assume the risk of an accident, but your monthly and annual savings might make it worth it for you.
No need to wait on a lengthy claims process when you are self-insured. Get your car fixed right away and settle any liability issues as soon as possible, without having to wait on adjusters and approvals.
Self-insurance isn’t the same as no insurance, nor is it an all-or-nothing choice. Deciding when to self-insure and when to buy car insurance can be tricky, but if you get it right, the annual savings on insurance premiums can really add up. And if you decide paying an insurance company for coverage makes better financial sense for you, take the time to shop around for car insurance to ensure you get the best deal on the coverage you need.
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