What it is:
To self-insure means to use one's ownto pay for unexpected losses (rather than insurance).
How it works (Example):
Let's say John Doe owns a restaurant. He buys property and casualty insurance that only covers claims over $100,000. Any losses below that are John's to deal with. John figures that smaller losses are so unlikely and infrequent that it's cheaper to pay for the losses when they happen instead of sending an insurance companyevery month. Thus, we might say John self-insures below $100,000.
Many companies choose to self-insure their employees, meaning they don't rely on insurance companies to pay for the claims.
Why it Matters:
People and companies most often choose to self-insure when they are reasonably certain that certain losses are unlikely and/or less expensive to deal with than paying to insure against those losses.
Self-insurance is one way to explain why retirees generally need less life insurance than, say, people in their 30s: A young family that loses a breadwinner is far more financially devastated than a retired couple that would face little or no income loss if one person dies.