What is self-insured auto insurance?

Instead of paying monthly premiums to an auto insurance company to cover damages and injuries in the event of an accident, you can use self-insured car insurance. This only works if you have enough money to cover your liability.

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Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

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Written by Rachel Bodine
Insurance Feature Writer Rachel Bodine

Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years Leslie Kasperowicz

UPDATED: Apr 26, 2022

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Self-insured car insurance is an alternative type of vehicle insurance. Many people are unaware that most states allow drivers to insure themselves.

Yes, you can genuinely self-insure your vehicle. This self-insurance complies with state requirements for vehicle insurance – at least in some states.

Obviously, there’s a catch – or else everybody would be self-insuring their vehicles. Today, we’re explaining everything you need to know about self-insured car insurance, also known as self-insurance.

How does self-insurance work?

To qualify for self-insurance, you need to have a lot of money or a lot of vehicles.

Typically, the reason we buy ordinary vehicle insurance is that most of us don’t have $1 million or $2 million to cover our liability in an accident. Instead of keeping our own reserve fund of cash, we pay an insurance company a monthly fee. In the unlikely event we’re in an accident, the insurance company covers our liability.

However, some people don’t need an insurance company to cover their liability.

Basically, if you can prove you can cover your own liability similar to how an insurance company would cover your liability, then you may qualify to be self-insured.

In other words, self-insuring is a way to reduce your insurance costs by maintaining an adequate insurance reserve fund. It’s essentially a bunch of cash reserved exclusively for your insurance needs.

When you maintain this personal “self-insurance” reserve fund, you’re assuming some of the risks yourself. Since you’re assuming some of the risks, you can immediately reduce your current insurance costs. You’re not paying someone else to assume risk on your behalf.

The end result is that self-insurance premium rates are lower.

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Should you create a self-insurance reserve fund?

If you have a stack of cash that isn’t currently serving a purpose, then you might consider creating a self-insurance reserve fund. Is it really the right idea for your insurance needs?

A self-insurance fund can be used for a number of different purposes. Here are some of the reasons you might consider creating your own self-insurance reserve fund:

Eliminate the Need for Some Types of Insurance Policies

If you create your own self-insurance policy, then you’re assuming the risk yourself. When you pay an ordinary insurance policy, you’re paying a premium because someone else is assuming your risk. With self-insurance, that’s not the case.

In practical terms, this means you can avoid getting full coverage automobile insurance for a vehicle that has little value. It also means you can avoid getting insurance on your valuable items – like jewelry – because you can pay the replacement cost yourself.

Use Self-Insurance to Make Home and Auto Insurance Deductibles Larger

You can use self-insurance to increase the size of your home and auto insurance deductibles. Effectively, this means you’re insuring yourself (through your self-insurance fund) for the amount up to each deductible. This allows you to immediately lower your premium payment.

Obviously, this doesn’t require you to open some special policy with your insurance company. This is just you maintaining a cash reserve to pay for a higher insurance deductible.

Can anyone get self-insurance?

In some states, anyone can create their own self-insurance fund that legally functions as liability insurance. In other states, self-insurance is not allowed in any way, shape, or form.

In all states, drivers are required to submit proof of financial responsibility. “Proof of financial responsibility” doesn’t necessarily mean an insurance policy. If you can prove that you have funds set aside to pay for your claims, then you might qualify as self-insured.

Some states require drivers to have multiple cars in order to qualify for self-insurance. In other states, you only need to have a minimum amount of money set aside to qualify for self-insurance.

Ultimately, self-insurance laws vary between states. Check your local regulations before you cancel your insurance policy.

Are cash reserves enough to prove self-insurance?

As mentioned above, laws vary between states. However, if you can prove financial responsibility, then you may qualify for self-insurance. In some states, having a bank account with large cash reserves is enough to prove self-insurance.

In other states, you’ll need more than cash reserves to prove self-insurance. Some states require the following:

Surety Bond: In some states, you’re required to post a surety bond that you’ve purchased from a licensed surety company. States will dictate the specific amount required for this bond.

Deposit Funds with the State: Some states allow self-insured car insurance, but they don’t allow you to keep the entire cash reserve yourself. You must deposit money with a specific state agency (like the state’s office of insurance or the state’s comptroller’s office). To prove you have self-insurance, you need to display a certificate showing you have deposited a minimum amount with that state agency. Typically, you’re required to deposit somewhere between $30,000 and $70,000.

Certificate of Self-Insurance: Some states require you to display a certificate of self-insurance.

Can anyone get self-insurance?

The reason you don’t hear much about self-insurance is that it’s not accessible to most “ordinary” people. Typically, to qualify for self-insurance, you need to meet one of these two conditions:

  • Have a lot of money
  • Have a lot of cars

In Texas, for example, self-insurance is only available to those who own more than 25 vehicles.

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Self-insurance might seem like a strange concept. Many people don’t know it exists. Some states don’t allow it.

However, self-insurance is a way for those with extra cash (or a lot of vehicles) to reduce their insurance burden. It’s one of the “secrets” that wealthy people use to insure a number of highly-valuable vehicles. These people can afford to maintain their vehicles and pay for minor accidents, which reduces the overall number of claims they file.

Ultimately, talk to your insurance company to see if self-insurance is an option for you.

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