Life insurance vs. self-insurance

Self-insurance is when you save enough money to fulfill your remaining financial obligations, at which point you don't need life insurance.

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Rebecca ShoenthalEditor & Licensed Life Insurance ExpertRebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

Edited by

Antonio Ruiz-CamachoAntonio Ruiz-CamachoAssociate Content DirectorAntonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.
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Reviewed by

Maria FilindrasMaria FilindrasFinancial AdvisorMaria Filindras is a financial advisor, a licensed Life & Health insurance agent in California, and a member of the Financial Review Council at Policygenius.

Updated|4 min read

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Life insurance provides financial protection for your family while they still depend on your income. You pay a premium and your beneficiaries get a death benefit if you die while the policy is active. The death benefit can cover your family’s expenses, including a mortgage and childcare.

But some people have enough assets to self-insure, which means they have enough saved to support their debts and dependents. Even if you’re unable to self-insure today, you’ll likely be able to rely solely on your savings in the future instead of buying life insurance. 

Key takeaways

  • Most people wont have enough money saved to self-insure until theyre older.

  • A life insurance death benefit isnt subject to taxes or probate.

  • If you are debt-free and dont have dependents, you may not need life insurance.

What does it mean to be self-insured for life insurance?

Self-insurance means that if you pass away, your loved ones have enough money to cover all of their expenses and financial needs with your current assets. They would have continued cash flow regardless of your ability to earn an income and you wouldn’t pass debt on to them.

When can you use self-insurance instead of life insurance?

To figure out if you can actually afford to be self-insured, you need to look at your savings and spending. That includes current expenses like housing and utilities, and future expenses like childcare.

Here’s an easy formula to know if you can self-insure for life insurance: Does the amount your family needs for the future equal the amount you have in liquid assets?

If the answer is yes, then you can probably self-insure without life insurance. But if the answer is no, then buying life insurance coverage makes sense. 

How much life insurance do you need?

Your life insurance coverage should be large enough to help your beneficiaries cover any expenses and financial obligations they’d be responsible for in your absence.

Our experts suggest your coverage should be 10 to 15 times your income, but the actual amount will depend on your unique coverage needs.

To manually calculate how much life insurance you need, start by calculating your financial obligations and then subtract your liquid assets. The result is the amount of life insurance you need.

You can run these numbers manually or use our life insurance coverage calculator. Every person’s coverage needs are different depending on their situation.

  • A retiree who has paid off their mortgage and whose spouse has their own retirement savings may be able to self-insure for life insurance simply by having enough money saved to pay for a funeral.

  • A young parent, on the other hand, may need millions of dollars in liquid cash to ensure their family has the support they need.

→ Learn more about how much life insurance you need 

Pros and cons of self-insurance

Self-insurance makes sense if you don’t need life insurance to support your family financially if you die.

Pros of self-insurance:

Cons of self-insurance:

  • No financial safety net if you lose assets due to a hardship, market conditions, or an emergency

  • Potential for inheritance, estate, and other taxes

  • Risk of assets going to probate court

The biggest disadvantage of self-insurance is the lack of extra security. Even if you have ample savings, an unexpected life event, medical bill, or market crash can change your financial situation.

The advantages of life insurance outweigh the disadvantages for most people.

Ready to shop for life insurance?

How to become self-insured

To become self-insured, you need to grow your assets and shrink your expenses. To do that, you need to build a budget that fits your lifestyle and leaves a little left over, so you have enough saved to self-insure when your term life insurance runs out.  

Investing your money early and diversifying your investments can help you build your assets too. There are a lot of ways you can do this:

  • Short-term investments: These let you easily and quickly access the money if needed.

  • Long-term investments: Let these sit for as long as possible (years or decades), to earn compound interest.  

  • Retirement accounts: Take advantage of an employer-matched 401(k) or use an IRA.

For your retirement accounts to help you self-insure, you must add a beneficiary. Otherwise, a court will decide where the money goes. Make sure to update your beneficiaries with every major life event — the same goes for life insurance beneficiaries

As your money grows, the amount you’ll need to rely on life insurance will decrease and you’ll eventually have enough to be self-sufficient.

How term life insurance can help you become self-insured

Buying life insurance to become self-insured seems counterintuitive. But few people can be self-insured throughout their entire life.

Most people’s expenses look like a bell curve over time. When you’re young, you don’t typically have dependents or expenses to cover if you die (unless you have private student loans), except a funeral. 

But when you buy a home, get married, or have children, your expenses rise with mortgages, retirement planning, and childcare costs. Then, once the kids are out of the house and you’ve paid off your home, your expenses go back down.

Term life insurance offers financial protection through that big middle hump until your expenses are low again — at which point you can start self-insuring.

Term life is one of the most affordable life insurance coverage options on the market, only lasts for a set term, and comes with few rules and tax restrictions. Term life is the best option for most people looking to protect their income and provide their family with a financial safety net to cover any debts — including a mortgage or any other types of personal loans.

→ Learn more about term life insurance

Being self-insured isn’t necessarily complicated — it's just harder get to that point if you’re still paying off loans or supporting younger children.

Buying life insurance is the easiest way to make sure your family is protected until you get there.

Author

Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

Editor

Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

Expert reviewer

Maria Filindras is a financial advisor, a licensed Life & Health insurance agent in California, and a member of the Financial Review Council at Policygenius.

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