State Farm Insurance License Practice Exam

What is NOT a characteristic of self-insurance?

1. Assuming responsibility for losses

2. Setting funds aside for potential claims

3. Making regular premium payments

4. Limiting reliance on traditional insurance

The correct answer is: Making regular premium payments

Self-insurance involves a strategy where an individual or business takes on the financial responsibility for potential losses instead of transferring that risk to an insurance company. While self-insurers do assume responsibility for their own losses and typically set aside funds to cover potential claims, as well as limit their reliance on traditional insurance, they do not make regular premium payments like one would with conventional insurance policies. With self-insurance, there is no insurance provider collecting premiums, which differentiates it from traditional insurance where regular premium payments are made in exchange for coverage. Instead, self-insurers allocate funds to a reserve that can be used as needed for claims or losses they incur. This approach is often used by businesses or individuals to manage their risk while maintaining control over their funds, aligning with the characteristics of self-insurance. The absence of premium payments is a defining feature that distinguishes self-insurance from traditional insurance solutions.