A penny saved is a penny insured

September 16, 2011 3:27 PM

Downsides to setting aside cash to self-insure a car?

I'm considering dropping comprehensive and collision auto insurance in the near future, in favor of self-insuring these risks (obviously I'd keep the liability insurances and uninsured motorist). Basically, I'd keep around an amount of cash equal to the replacement value of the car in liquid savings, and contribute semi-annual "premiums" to the fund equal to the market quotes for comprehensive / collision insurance, and pull from that to handle the repairs.

I figure this will save money, but I'm wondering what advantages and services I might give up in going to liability only, and how I might replace them. Are there group negotiated benefits or something I'm not considering?

posted by pwnguin to work & money (16 answers total)

Well, the problem is that you are not actually "insuring" yourself. The point of insurance is to pool risk so no one member of the pool bears the full cost of loss, because not everyone will suffer the loss. You pay a premium, but the premium cost doesn't approach the price of the potential loss. (if it does, you are over insured). By contrast, if you set aside the replacement cost of your car, you are putting in the entire amount of the potential loss rather than the smaller premium.
posted by yarly at 3:33 PM on September 16, 2011 [2 favorites]

If you're looking at this from a purely ideal mathematical expected-value standpoint, it's probably not as good of an idea as it sounds. Many insurers actually lose money on the underwriting side of their business - they pay out more in claims than they take in from premiums. They use the huge pile of cash generated from the premiums to invest in other ventures that earn a higher rate of return than you'd be able to in your savings account to turn a profit. Warren Buffett talks about this in his shareholder letters.

That said, at the point at which you have enough cash to buy your next car and believe yourself to be enough of a lower risk than the average consumer to make up the difference between your rate of return and the investment gurus at insurance firms, I'd go for it. This is what I do (I don't drive much so I'm much less likely to wreck my car, I could go for a few months without a car anyway, and I could pay cash for a new one).

I don't see any point structuring this in terms of semi-annual payments. Either you can afford to replace your car (you don't need to contribute), or you can't (this is a bad idea unless your lifestyle is car-optional). Repair costs from car vs concrete barrier incidents come from the "general emergency fund" that I'd use to replace the water heater, for example.
posted by 0xFCAF at 3:56 PM on September 16, 2011 [2 favorites]

no downside, assuming the replacement value is a reasonably high % of the yearly premium.

My guess is you can get nearly all of the savings by only self-insuring the first few k in losses. Its just how the math on the losses works out. Its not a linear function - there are lots of low severity loss claims, lots of total claims, not much in the way of middle severity. Do the math and shop it around.
posted by JPD at 3:59 PM on September 16, 2011

[few comments removed, read carefully and carry on]
posted by jessamyn at 4:00 PM on September 16, 2011

My understanding is that it's a bit silly to carry comprehensive insurance if your car is worth less than a few thousand dollars. Assuming that you're keeping the legally required level of insurance, and assuming you're disciplined enough to actually save the money, there's little down side to dropping comprehensive.

(Not sure about collision, though.)
posted by ErikaB at 4:04 PM on September 16, 2011

What's the opportunity cost to staying that liquid? Are we talking $1k? $10k? $100k? That should be part of your calculation.
posted by TheNewWazoo at 4:04 PM on September 16, 2011 [1 favorite]

One downside - your insurance deals with the other motorist for covered collisions. This can save much time and grief. The time I opted to deal with a motorist directly (he was at fault), it turned into a bit of a time sink (him - trust fund dude with apparently nothing better to do than haggling over every dollar of damage)
posted by zippy at 4:37 PM on September 16, 2011

If you don't drive a car worth all that much, and liability-only coverage satisfies your state requirements, go for it.

As for uninsured motorist coverage... If you have at least "worst case" medical insurance, I wouldn't even worry about it. You can always get treatment and sue later (and worst case, you end up out by your max-out-of-pocket medical costs, which at least in my case only adds up to six years of what I pay in auto insurance, and in 18ish years, I have never needed my uninsured coverage).

In fact, I never even thought of this great idea before... Time to do some research on my own state's laws... Thanks!
posted by pla at 4:53 PM on September 16, 2011

I think it's smart that you are planning to keep uninsured/under-insured insurance. This is what covers hit-and-run drivers, and it's pretty cheap. I've done exactly what you are proposing, and over the years I've had no problems with it -- and saved quite a bit of money.

You can take it a step further, too. Keep a car, and make "car payments" to yourself in an account just for that. After your "note" is paid up, you have cash for a car. Buy the new car with the cash, and then turn around and make those "car payments" to yourself. It's a bit riskier (because you have more money on the line), but if you never have a car note, you are never required to carry comp and collision.
posted by Houstonian at 5:39 PM on September 16, 2011

From Ms. Vegetable, who works for a major auto insurance company:
Do it. The only cost is really opportunity cost. Collision, especially, is a Very Expensive Coverage. Comp, on the other hand, is sometimes pretty darn cheap, and covers things wholly out of your control, like a tree falling on your car. You might be giving up random small coverages like towing (sometimes they are linked to you having both coverages), but nothing major. One note: collision is what pays to fix your car if you are at fault in an accident, so be careful driving.
Liability is really what you need. And do keep uninsured/underinsured. (Random insurance pricing fact: companies subsidize the liability coverages.)
So drop collision, at least, see how expensive your comp coverage is, and drive safely.
posted by a robot made out of meat at 6:20 PM on September 16, 2011 [5 favorites]

I COMPLETELY agree with Ms Vegetable. I have never insured my car for collision in the last 30 years, also, never been in an accident. I DO however have EXTREMELY high comprehensive insurance coverage. If I hurt someone I want to take very good care of them if needed, and since I havent paid collision in the last 30 years and have invested well I have a lot of assets to protect. Of course, I drive a relatively old but reliable car, since I dont like depreciating assets. Basically, if the cost of replacing your ride would not be catastrophic, why bet against yourself by buying insurance that bets against you?

BTW, I have quadruple the minimum legal coverage on two cars for me and the Mrs, and we still only pay $59 bucks a month. Insurance company has very good service too! Rhymes with Dyke-O.
posted by jcworth at 9:17 PM on September 16, 2011

I DO however have EXTREMELY high comprehensive insurance coverage. If I hurt someone I want to take very good care of them if needed, and since I havent paid collision in the last 30 years and have invested well I have a lot of assets to protect.

These two sentences don't belong together. Comprehensive, as defined by my insurer covers damage to my car from random crap like fire, hail, and trees falling on the parked car. Liability insurance covers things that I did to hurt people or their property.

TheNewWazoo: "What's the opportunity cost to staying that liquid? Are we talking $1k? $10k? $100k? That should be part of your calculation"

It's not a $100k car. Closer to $10-15k. But it's a valid point. I wonder how liquid this fund need to be. Technically, stocks are fairly liquid, but the returns are highly variable for anyone not running Berkshire Hathaway. And one does have to make certain assumptions about market return. Perhaps JPD's traditional 'raise your deductible' is more effective than the extreme version I've laid out.
posted by pwnguin at 10:04 PM on September 16, 2011

I do this with my vehicle in exactly the same range. I don't keep an explicit "car replacement fund" other than an amalgamated taxable account that is a combination of an emergency fund, car expenses account, and long term savings account. Agreed, the returns are variable, but so long as you always have the ability to liquidate the account to replace your car, that's really an academic consideration - although do keep in mind that liquidating your investments makes your injury even more painful. I won't skip on liability insurance and insure myself to approximately 2x my net worth.

I'm mostly of the opinion that the choice is a wash. Car insurance is a very low profit margin business, so I don't think I'm saving that much money. That said, insurance companies are not particularly easy to deal with, so I'd rather have the flexibility of taking care of my own vehicle the way I want it to be taken care of.

Disclaimer: I have never had an at-fault accident, so I have never had to tolerate a massive expenditure of cash to keep a working vehicle. I know I'm able to, but I've never had to.
posted by saeculorum at 10:46 PM on September 16, 2011

There are a lot of good ideas here, but consider the bad luck scenarios: car gets stolen, and you replace it. Six months later, the new one gets stolen. Your savings is wiped out and you have no car. That's why you want insurance. To protect your assets.

But it is definitely a good idea to look at getting a policy with a high deductible. When I last did the calculations (a long time ago, however), moving from the $250 deductible to the $1000 deductible paid for itself in under a year. (IE, if I banked the difference in premiums, I would have $750 saved up within a year.)
posted by gjc at 7:11 AM on September 17, 2011

You can start now by having a very high deductible on collision. My car is not worth much, so I have no collision, but when I've had nicer cars, the high deductible (5,000) is my form of self-insurance.
posted by theora55 at 10:02 AM on September 17, 2011

I'd think carefully about keeping comprehensive coverage, as it also covers things like theft, vandalism, collisions with animals, and depending on your company, window breakage (usually with a much lower deductible).

The recession seems to have triggered an uptick in auto thefts, my neighborhood had a string of car thefts a few years back, and I occasionally drive to visit my parents who live out in deer-country, so carrying Comprehensive is pretty much a no-brainer for me, considering how cheap it is.

On the other hand, I'm paying a significant of my car's value in collision coverage every year, so I may drop that in the near future. Raising the deductible doesn't save enough money in my case to be worthwhile, especially since it makes the gap between the deductible and my clunker's total value extraordinarily narrow (basically, it'd be statistically improbable to get into an accident where the damages were high enough to warrant involving the insurance company, but not high enough to total out the car).
posted by schmod at 7:38 PM on September 18, 2011