Dear Gary,
I just read an article on "Medical Care for Less". I was wondering how to go about being "self-insured". Could you tell me more about this? How it works? Do you pay monthly premiums? Who do you call to set this up??? Thanks! Molly

Molly knows much more about 'self-insurance' than she realizes. In fact, she's already using it.

Consider an illustration. She doesn't have insurance to cover her everyday dishes. If one is dropped, she's responsible for living without it or buying a replacement on her own. In fact, it would be silly to have insurance for that type of loss.

To understand self-insurance, Molly needs to recognize why it would be silly to insure the loss. The answer is fairly obvious. She can afford to replace a broken plate without anyone's help.

But, suppose that she had a valuable set of antique china. She might have insurance to protect her in case of theft or damage. Why is that smart? Because Molly couldn't afford to replace an expensive plate if it were damaged or stolen.

That's the gist of self-insurance. We all face potential expenses. Some are big and we choose to buy insurance to cover them. Others are smaller and we decide to handle them ourselves. In effect, we've chosen to "self-insure".

Today people feel that they need insurance for every possible expense. The idea that insurance is for losses that we can't afford has gradually been lost. People seem to think that insurance is a way of shifting the cost to someone else. It's not. It's really just putting a large number of people together knowing that only a few will suffer big losses. And with everyone in the group making a small contribution there will be money to pay the few big losses.

Small expenses really shouldn't be covered by insurance. Remember Molly's plate. The insurance paperwork would only add to the cost of replacing the plate. Somebody has to pay for the claims adjusters and the people approving and writing checks.

In fairness, sometimes an insurance company will get a better price because they're buying large quantities of an item. But in many situations their negotiating skills don't offset the additional expenses.

OK, so now that we know what self-insurance is, why would Molly want to choose it? Simple. For the right risks it's actually cheaper to be self-insured.

How does Molly become self-insured? She begins by evaluating how big a loss she could afford to handle financially without help.

Self-insurance doesn't have to be an all or nothing deal. In fact, it's probably a bad idea for Molly to choose to be completely self-insured for medical expenses. Hospital bills can be painful!

She would do better to be self-insured for doctor's visits and still carry a major medical policy that would pay for a trip to the hospital (after a deductible was covered). That way she'd be responsible for the small bills, but would have someone to pick up the big ones if they occur.

Next she'll look for an insurance company that offered a policy that would only cover the things that Molly couldn't afford to handle herself.

If she's canceling existing coverage, Molly would be wise to set aside the money that would have gone to premium payments. She can expect to need it later to pay for future medical expenses.

Before you self-insure, make sure you understand the worst-case situation. Know exactly what you could be facing if you don't have insurance. And don't self-insure unless you have the financial resources to face the risks that you're accepting. Don't risk bankruptcy to avoid an insurance premium.

Review your decision regularly. Changing circumstances could mean that you need to go back to having someone else assume the risk.

Other insurance areas could provide savings for Molly. Checking deductibles is a good idea. The deductible is the amount that you pay before your insurance begins to cover a loss. Call your insurance agent. Ask them the difference between $250 and $1,000 deductible on your car insurance. In effect, you'd be increasing the amount of self-insurance up to $1,000. Same thing with your homeowner's policy.

Self-insurance isn't an automatic solution to the high cost of medical coverage. Under the right circumstances it can help. But it's not a magic pill that brings high costs down. And, remember that self-insurance works better for people who have accumulated some financial resources. If you don't have any savings, self-insurance isn't for you.