Self-Insuring: Maybe Not a Bad Idea

Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.

Tim: Good afternoon. My name is Tim Norris. I’m with the National Real Estate Insurance group, here with you for another episode of the REI Classroom. Today we are going to be talking about self-insuring and why it may not be a bad idea.

Mike: This REI Classroom real estate lesson is sponsored by UglyOpportunities.com.

Tim: When I speak to an investment group, talking about their insurance issues, many times, I ask by show of hands who in the room self-insures. And frankly, every now and then a few hands go up, but more often than not, none of them go up when I ask that question. Well, in reality, we all carry that which is known as a deductible. A deductible, by nature, is a form of self-insurance. Think of it this way, the higher the deductible you carry, that is, the higher the amount of insurance that you retain, the lower your premium. And depending upon your financial situation, my rule of thumb is to take the minimum claim you would ever file and double that, and at least carry that as a deductible. For instance, if you’re not going to file a $1,000 incident that could be a claim, then by all means, don’t carry a $500 or $1,000 deductible, carry a little bit more. The higher deductible you carry, the lower your premium. If you play with the law of large numbers, or if you have any actuarial background, at the end of the day you are usually better off with a higher deductible anyway. The one thing, however, that I would probably never advise someone to self-insure, and I know they never say “never,” but that’s a liability exposure. It’s an unknown risk. When it comes to property insurance, you know what you have at risk, whether it be in the form of a deductible, or in a house itself you may have bought at an auction or a Sheriff sale for $10,000, and the house itself, until you get in there to work on it, you may think that for $10,000 you don’t want to pay $150 or $200 a month to insure that house right now, by all mean self-insure. The more you can self-insure the better off you really are. However, the liability exposure that the same house might present while it is unoccupied or before you have the work done on it, is really something you don’t have any knowledge of. In other words, you don’t know if a group of kids are going to sneak in there at night with a 12-pack of beer and somebody gets hurt, and if you own it, even for those few days, while you resell it or before you get someone out there to get to work on it, it is still an exposure that in my mind that as an investor and as an insurance advisor, you don’t want to take on yourself. So again, self-insure as much as you possibly can on the property side, but by all means, rarely, if ever, consider self-insuring on the liability side.

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