A basic financial planning rule of thumb is to only insure against the large losses and self-insure against the small losses. What do we mean by self-insure? To self-insure means that we pay for small losses out of our own pocket. We make sure we have an adequate emergency fund that’s invested in an easily accessible money-market like account that we can tap quickly without loss of principle. (See our previous blog posts on establishing an emergency fund, Monday, June 8th and Wednesday, June 10th).

So what kind of losses do we self-insure? Let’s start with deductibles. Individuals often come to us with auto and home insurance policies containing $250 deductibles. You should seriously consider deductibles of $500 or even $ 1,000. The higher deductibles can significantly lower your premiums. Also, if you file a lot of small claims, many insurers will likely raise your premiums, so you’re better off paying for small claims yourself anyway.

If you’re healthy, consider a high deductible medical insurance policy that pays for the major medical expenses. Avoid buying insurance on new appliances or electronics. Over the long run it’s often better to avoid the cost of insurance and just replace the items. You’ll then have a brand new product and perhaps some new features, as well.

Be careful about purchasing travel insurance. Unless it’s a very expensive trip you may be better off just assuming the risk yourself. You also need to take care to make sure the travel insurance doesn’t overlap with other coverage. Your health insurance may cover you while you travel and your credit card company may cover medical emergencies, lost luggage or trips charged on their cards.

If you feel good because you often receive a small check from you insurance company for a small loss, you are costing yourself a considerable amount of money in high insurance premiums. With the proper coverage, you can save enough on your insurance premiums to pay for the occasional small loss.