In self insurance, you establish a savings plan so that you have money available should a catastrophe happen. Self insurance is primarily used by small businesses for health and workers' compensation insurance.
With self-insurance, the business predetermines and then pays a portion or all of the medical expenses of employees in a manner similar to that of traditional health care providers. Funding comes through establishment of a trust or a simple reserve account. As with other health care plans, the employee may pay a portion of the cost in premiums. Catastrophic coverage is usually provided through a stop loss policy, a type of coinsurance purchased by the company.
The plan may be administered directly by the company or through an administrative services contract.
The advantages of self-insurance are:
- Programs can be flexible. They are designed to reflect employee needs, including medical and dental care, prescriptions and so on.
- Mandated benefit laws and state insurance premium taxes do not affect these plans.
- The employer retains control over the timing and amount of funds paid into the plan and can manage costs more directly.
- Administration of these plans can be more efficient.
- Over time, these plans can save money.
The drawbacks to self-insurance are:
- Health care is costly and heavy claims years may prove extraordinarily expensive.
- Commitment for the long haul is necessary to achieve significant savings.
- The of self insuring is not tax deductible, whereas the cost of providing health insurance for your employees is.
Self-insurance can be a viable option for small businesses, but it should be undertaken only after careful study.
