Life insurance vs. self-insurance

Self-insurance is when you've saved enough to fulfill any remaining financial obligations, at which point you don't need life insurance.

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

But some people have enough assets to self-insure, which means no one relies on their income or 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 liquid assets in the future and avoid paying for life insurance as you get older. 

Key Takeaways

  • Most people don't have sufficient assets to be self-insured.

  • A life insurance death benefit isn't subject to taxes or probate.

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

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

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 existing assets. They would have continued cash flow regardless of your ability to earn an income.

How do you know if you can be self-insured for life insurance?

To figure out if you can actually afford to be self-insured, you need to look at your assets and costs (including future expenses).

Here’s an easy formula to know if you can self-insure for life insurance: Does the amount your family needs for the future = 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 makes sense. 

How much life insurance do you need?

To figure out how much your family would need if you die, start with a life insurance calculator, which can help determine future and present expenses.

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 probate

The biggest disadvantage of self-insurance is the lack of extra security. Even if you have ample assets, 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.

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How term life insurance can help you become self-insured

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 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 child-care costs. Then, once the kids are out of the house and you’ve paid off your home, your expenses should go back down.

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

→ Learn more about term life insurance

How to become self-insured for life insurance

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 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), so the returns compound.  

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

Remember, in order for your retirement accounts to self-insure you, you must add a beneficiary. Otherwise, these accounts could get probated through your estate. You should 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.

Being self-insured isn’t necessarily complicated — it can just be difficult to 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.

Frequently asked questions

What does it mean to be self-insured?

If you’re self-insured, that means you have enough assets and low enough expenses to support your family if you die without buying a life insurance policy.

Is it better to self-insure?

Self-insurance makes sense for some, but most people can benefit from having a life insurance policy. A life insurance policy is tax-free and isn’t subject to the same volatility as savings, investments, or other assets. 

What are the benefits of life insurance?

Life insurance provides your loved ones with financial protection if you die. A tax-free payout is the main benefit.