Self-Insuring Your Car: Is It Worth The Risk?

Self-insured car insurance is an option in some states that allows the vehicle owner to assume all the responsibility for protecting their car. This means that instead of paying an insurance company, you have your own insurance account set aside with enough money to cover potential losses. While self-insurance can save you a lot of money on insurance premiums, it can also be a gamble as you are shouldering the risk yourself. To self-insure, you will need to either leave a cash deposit with your state's Department of Motor Vehicles or purchase a surety bond.

Self-insurance requirements by state

Self-insurance requirements vary across the United States, with nearly every state mandating drivers to carry a certain amount of car insurance before they can register a car or drive on public roads. However, there are some states that allow drivers to self-insure by posting a bond or cash deposit with the state in lieu of traditional car insurance. Here is a breakdown of the self-insurance requirements by state:

States Allowing Self-Insurance:

• Maryland: Requires a minimum of $35,000 cash deposit or surety bond.
• Ohio: Requires a minimum of $50,000 cash or its equivalent for the first vehicle, $60,000 for the second, $65,000 for the third, and $70,000 for the fourth.
• Georgia: Requires a minimum of $40,000 in unencumbered net worth.
• North Dakota: Requires a minimum of $50,000 surety bond or security deposit and $100,000 net worth.
• Pennsylvania: Requires a minimum of $300,000 surety bond.
• Indiana: Requires a minimum of $155,000 security deposit per vehicle.
• New Mexico: Requires a minimum of $50,000 in secured collateral for the first vehicle, plus $10,000 for each additional vehicle.
• Alaska: Requires evidence of $115,000 in net worth.

States Not Requiring Car Insurance:

New Hampshire and Virginia are the only two states that do not require car insurance. In Virginia, drivers can choose to pay an annual uninsured motorist fee of around $500 instead of purchasing car insurance. However, this fee does not provide any coverage in the event of an accident. In New Hampshire, residents must demonstrate their ability to meet the state's Motor Vehicle Financial Responsibility Requirements in the event of an at-fault accident. While there are no mandatory insurance requirements, the state sets minimum limits if residents choose to buy a policy.

Pros and cons of self-insuring

Self-insuring is a risk management strategy where individuals or companies set aside funds to cover unexpected losses instead of purchasing third-party insurance. It is a financial approach that allows individuals and businesses to take control of their risk management.

Pros of Self-Insuring

• Cost savings: Self-insurance can result in savings as you avoid paying premiums that include the insurer's profit margin.
• Tailored coverage: Self-insurance allows for more customized coverage to meet your specific needs.
• Investment potential: Funds set aside for self-insurance can potentially be invested to grow over time.
• No exclusions or limitations on coverage.

Cons of Self-Insuring

• Financial risk: Self-insuring carries the risk of not having enough money to cover damages or medical care in the case of an unexpected event.
• Legal requirements: In many cases, individuals and businesses are legally required to have insurance, such as auto insurance for drivers in most states.
• Discipline required: Self-insuring demands financial discipline to accumulate and maintain the necessary funds for emergencies, such as accidents, natural disasters, or death.
• High risk of costly claims.
• Requires a third-party administrator.
• Ensuring confidential information is secure.
• Takes 3-5 years to reap the benefits (may be difficult to maintain during a recession or economic downturn).
• Requires a large upfront investment that isn't feasible for most people.

How to set up self-insurance

Setting up self-insurance for your car is a big decision and a risk, so it's important to do your research and understand the process. Here's a step-by-step guide on how to set up self-insurance:

• Check State Laws: Self-insurance for vehicles is not permitted in all states, so the first step is to check if your state allows it. Only a handful of states allow self-insurance for personal vehicles, including California, Connecticut, Florida, Georgia, Hawaii, Indiana, Maryland, New Mexico, North Dakota, Pennsylvania, and Vermont. Some states, like Alaska, only permit self-insurance if you have a large fleet of vehicles, often 25 or more.
• Understand the Requirements: If your state does allow self-insurance, find out the specific requirements. This usually involves proving financial responsibility and having enough money set aside to cover potential losses in the event of an accident. The amount required varies by state but is typically between $30,000 and $60,000.
• Choose a Method: There are typically three ways to set up self-insurance:

• Cash Deposit: You can make a cash deposit into a special account with the Department of Motor Vehicles (DMV) or the state Department of Insurance. The account is monitored by the DMV, and they will withdraw money directly to pay for any damages or injuries you cause in an accident.
• Certificate of Self-Insurance: If you have a certain number of vehicles registered in your name (often 25 or more), you may be eligible for a certificate of self-insurance. This document states that you can cover medical bills, repair costs, property damage, and bodily injury liability costs.
• Surety Bond: Some states allow you to purchase a surety bond, where you pay a financial institution a fraction of the required coverage amount. If you cause an accident, the bond will cover the damages upfront, and you will repay the financial institution later.

• Compare Costs: Before deciding on self-insurance, compare the cost of self-insuring with the cost of a traditional auto insurance policy. Consider the amount you would need to set aside and whether it is a feasible option for you financially.
• Complete the Application: If you decide to proceed with self-insurance and meet the requirements, complete the necessary application with your local DMV. Provide proof of financial responsibility, such as a security bond or cash deposit, as required by your state.
• Understand the Risks: Keep in mind that self-insuring is a risk. If you cause an accident, you will be responsible for covering all the costs, including repairs, medical bills, and legal liabilities. Ensure you have enough funds set aside to cover potential losses and are comfortable assuming this financial risk.

Remember, self-insurance for vehicles is not a decision to be taken lightly. It can save you money on insurance premiums, but it also comes with the potential for significant financial costs if you are in an accident. Always make sure you understand the requirements, risks, and your state's laws before setting up self-insurance.

Self-insurance vs driving without insurance

Self-insurance is an alternative to traditional auto insurance where the vehicle owner assumes all financial responsibility for protecting their car and covering any financial losses. Instead of paying an insurance company a premium each month, the driver will cover all costs related to an accident, theft, or liability.

To self-insure a vehicle, you will need to either leave a cash deposit with your state's Department of Motor Vehicles (DMV) or Department of Insurance, or purchase a surety bond. The amount varies by state but can be more than $150,000. This money is used to cover any liability, damage, and injuries you may cause to other drivers in an accident. For example, if your state requires $20,000 of bodily injury insurance per accident and $10,000 of property damage insurance per accident, you would need to deposit $30,000 into a special account with the state.

Self-insurance is not a viable option for most drivers. It is only legal in some states, and often only if you own multiple vehicles. It also requires a significant amount of money to be set aside, which is not feasible for those with limited financial means. Additionally, drivers with self-insurance may not qualify for certain auto loans or leases, as lenders typically require full coverage insurance.

Driving without insurance is illegal in nearly every state, and doing so can result in serious consequences. If caught, you may face fines, license suspension, registration suspension, community service, and even jail time. The specific penalties vary by state, but they can be steep and cause long-lasting repercussions.

While self-insurance may be tempting for those looking to save money on insurance premiums, it is important to carefully consider the risks and ensure you have the financial means to cover any potential accidents. If self-insurance is not a feasible option, there are alternative ways to save on insurance costs, such as choosing a higher deductible or usage-based coverage.

Self-insurance vs traditional insurance

Overview

Self-insurance and traditional insurance are two very different ways of managing risk. With self-insurance, you act as your own insurer and cover any losses yourself, whereas with traditional insurance, you pay a premium to transfer the risk to an insurance company that covers your losses.

To self-insure your vehicle, you need to prove financial responsibility by having a large amount of money set aside in case of an accident, or by owning a fleet of vehicles. You also need to meet the requirements of your state, as not all states allow self-insurance for personal vehicles.

With traditional insurance, you pay a premium to an insurance company, which then covers your losses in the event of an accident. Traditional insurance is typically required by law for driving a vehicle and for other situations like having a mortgage.

Pros and Cons of Self-Insurance

Self-insurance can be a good option if you have a lot of money or a lot of vehicles, as it can save you money on insurance premiums. However, it's important to note that self-insurance comes with the risk of having to pay for expensive accidents out of pocket.

Pros and Cons of Traditional Insurance

Traditional insurance provides peace of mind and protects you from financial devastation in the event of an accident. However, it can be expensive, especially if you have a history of claims or live in an area with a high risk of accidents.

Self-insurance and traditional insurance each have their own advantages and disadvantages. Self-insurance may be a good option if you have the financial means and are comfortable with assuming the risk, while traditional insurance is typically required by law and provides more certainty in the event of a loss.

Frequently asked questions