How does being self-insured differ from traditional insurance?
Self-insurance requires reserving money to pay for costs entirely out of pocket. This differs from traditional insurance, where you pay a premium to an insurance company that handles and pays out claims.
For example, many tenants who rent residential apartments may not have renter’s insurance. Instead of having an insurance company to help protect their belongings, they opt to “self-insure” and pay for any losses themselves.
What does being self-insured entail?
Self-insurance is a choice some businesses make to have more control over their coverage. For a company to be self-insured, it usually sets aside a minimum monthly amount to approximate a traditional premium. Minimum requirements for self-insurance can differ from state to state.
Many smaller companies opt for self-insurance as a way to manage costs. However, if the business has employees, meeting the minimum coverage for employees is closely monitored and can be difficult if not fully understood. It’s best to consult a legal professional or accountant to ensure you comply with state requirements.
Challenges of a self-insurance approach
While self-insurance may seem like an attractive option for some businesses, it comes with challenges you should take note of:
- You bear the entire financial burden of any losses or claims.
- Self-insurance programs require careful adherence to complex legal and regulatory requirements, which can become time-consuming and costly to navigate.
- Establishing and managing a separate reserve fund to cover potential claims can tie up significant financial resources.
- You have to manage claims processing, investigations, and settlements, which require specialized expertise and resources that aren’t necessarily readily available to small businesses.
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