Cost & Coverage
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What does it mean to be self-insured for life insurance?
Life insurance is a way to provide for your family in case you die while they are still dependent on your income. When you buy a policy, you pay premiums, and in the case of your death, your beneficiaries are paid a death benefit.
The death benefit is determined when you purchase the policy, and the benefit amount should ideally be enough to make your family whole in the event of your death — to pay off your mortgage, pay for your children’s education, even fund a taxable acount for your spouse’s retirement.
But not everyone needs life insurance.
Some people have enough assets that their dependents will be okay financially even the breadwinner dies. These people are considered to be self-insured. Having a self-funded plan means having enough cash to be able to cover everything your dependents may need or may ever need without a life insurance policy in place. Self-insurance is possible for people with huge assets, but also for people with low expenses.
Complete self-insurance means that, in the event of your death, your family would be able to cover all of their expenses and financial needs with your assets .There would be continued cash flow regardless of your ability to earn an income.
In order to figure out if you can actually afford to be self-insured, you need to look at your assets and costs.
Here’s an easy formula to know if you can self-insure for life insurance: Amount your family may need if you die = Amount you have in liquid assets
In order to figure out how much your family would need if you die, it’s useful to use a life insurance calculator, which can help you think about future and present expenses.
Depending on your family situation, the amount your family needs could be as low as a few thousand dollars for a funeral or as high as the balances of multiple mortgages, the tuition needs for multiple children, retirement needs for your spouse, and more.
A retiree who has paid off his mortgage and whose spouse has her own retirement savings may be able to be self-insured for life insurance simply by having enough money saved to pay for his funeral. A young parent, on the other hand, may need millions of dollars in liquid cash in order to be sure her family would be taken care of in case she died.
Read more about how to determine how much life insurance you need.
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For many, the easiest path to being self-insured is through term life insurance.
Buying life insurance to be 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 have a lot of things that you would need to be covered if you die besides a funeral (though for some people with private student loans, this may not be the case).
When you buy a home and have kids, your expenses rise with tuition, mortgage, and child-care costs. Then, once the kids are out of the house and you’ve paid off your mortgage, your expenses go back down.
Term life insurance can get you over that big middle hump and back to the other side where your expenses are low again – at which point you can start self-insuring.
Not sure how much life insurance you might need? Our life insurance calculator will give you a tailored recommendation.
In order for the amount you have to be enough for you to self-insure, it’ll have to grow. In order to do that, you need to manage your money wisely over the years:
Have a budget in place. You don’t want your chance at being self-insured to die by a thousand cuts (or, in this case, a thousand dinners out). Budget your money wisely so you aren’t wasting it frivolously, leaving you nothing to work with when your term life insurance policy expires. A simple spreadsheet or a number of apps can help you build a budget that fits your lifestyle and still leaves a little left over. Invest wisely. What should you do with that money you’ve saved up? Invest as much of it as possible. The earlier you start, the better off you’ll be. There are a lot of ways you can do this, and it’s good to diversify.
As your money grows, the amount you’ll need to rely on life insurance will decrease – and once it’s gone, you’ll have enough to be self-sufficient.
Being self-insured isn’t necessarily complicated – it can just be difficult to get to that point. Buying life insurance is the easiest way to make sure your family is protected until you get there.
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Yes, we have to include some legalese down here. Read it larger on our legal page. Policygenius Inc. (“Policygenius”) is a licensed independent insurance broker. Policygenius does not underwrite any insurance policy described on this website. The information provided on this site has been developed by Policygenius for general informational and educational purposes. We do our best efforts to ensure that this information is up-to-date and accurate. Any insurance policy premium quotes or ranges displayed are non-binding. The final insurance policy premium for any policy is determined by the underwriting insurance company following application. Savings are estimated by comparing the highest and lowest price for a shopper in a given health class. For example: for a 30-year old non-smoker male in South Carolina with excellent health and a preferred plus health class, comparing quotes for a $500,000, 20-year term life policy, the price difference between the lowest and highest quotes is 60%. For that same shopper in New York, the price difference is 40%. Rates are subject to change and are valid as of 2/17/17.
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