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How to self-insure your car

Choose whether to set aside liability coverage or pay an insurance company to do that for you.

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.

What is self-insurance?

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.

Car insurance vs. self-insurance

The differences between car insurance and self-insurance:

  • What you pay. With car insurance, you pay a monthly premium to a company based on the kind of car you drive, your driving record and other factors. To self-insure, you pay a one-time bond or deposit to the DMV, usually equal to or slightly higher than the insurance liability requirements for your state. The average deposit is around $50,000.
  • Coverage limits. Your car insurance limits can vary based on the coverage you purchase. And if the damages of an at-fault accident exceed your insurance limits, you are responsible to make up the difference. As a self-insured driver, you pay for all of the damages, whether the money comes from the deposit you posted or out-of-pocket.
  • Legal representation. Because your insurance company doesn’t want to pay unnecessary claims, if the company sees a legal defense for your fault in an accident, the company will represent you in court. If you’re self-insured, you are responsible for finding representation and paying your legal fees.

How much does it cost to self-insure a car?

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.

Which states allow you to self-insure?

Three states in the US offer lessened insurance requirements or exemptions:

  • New Hampshire. This is currently the only state with no insurance requirement. You don’t have to prove your ability to pay out-of-pocket up front. However, if you cause an accident, the state requires you to submit proof of your ability to cover the liability after the fact or risk losing your license and registration.
  • Virginia. In this state, you can pay a $500 uninsured motorist fee when you register an uninsured vehicle if you’re unable to get liability insurance. But paying that fee is your assertion that you are driving at your own risk and liable for any damages you cause.
  • Alaska. Since much of this state is made up of remote wilderness, you can be exempt from car insurance requirements as long as you haven’t been cited for a serious traffic violation within the last five years and you live in a town separated from the state highway system or roads with an average daily traffic volume of 500 vehicles or more.

Cost to self-insure by state

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.

StateDeposit amount
New Mexico$60,000
New York$25,000
North Carolina$85,000
Rhode Island$75,000
South Carolina$35,000
South Dakota$25,000, or $30,000 in securities

Who should consider self-insurance?

Self-insurance isn’t for everybody, but there are a few situations where it might be beneficial to take on the risks yourself.

  • You have a vehicle fleet. Businesses with fleets of vehicles may choose to self-insure as part of their risk management plans. Basically, the company decides that the cost to insure commercial vehicles is more than what they would pay should an accident occur.
  • You’re independently wealthy. If you have the money to cover the liability deposits, and you don’t want to deal with the hassle of an insurance company’s claims process, you might consider self-insuring. However, in some cases, you may find comfort in a specific insurance policy designed to protect your high net worth.
  • You’re considered uninsurable. For whatever reason, if you’re unable to obtain insurance, but you have the cash reserves to pay the deposit with the state or the ability to get a surety bond, self-insurance may be your only choice to continue driving.
  • You’re partially self-insuring. You may choose to buy the state’s minimum car insurance requirement for liability, but still choose to self-insure for any extras, such as comprehensive and collision damages. For example, if you drive an older car that isn’t worth much, you might skip comprehensive insurance coverage or even collision insurance, because the premiums you’d pay in a single year might cost more than the value of your car. This kind of self-insurance means you don’t have to pay a deposit and you’re still legally allowed to be on the road.

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What are the risks of self-insurance?

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:

Paying for damage after an accident

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.

Cost of damages

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.

How to pay for damages

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.

What are the benefits of self-insurance?

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:

Cover your insurance deductible

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.

Lower or eliminate car insurance premiums

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 claims process

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.

Bottom line

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.

Frequently asked questions about self-insurance

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