Life insurance vs. self-insurance

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

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Rebecca Shoenthal

Rebecca Shoenthal

Licensed Insurance Expert

Rebecca Shoenthal is an insurance editor and licensed Life, Health, and Disability agent at Policygenius in New York City. Previously, she worked as a nonfiction book editor. She has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.

Updated March 8, 2021|4 min read

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Life insurance provides cash for your family if you die while they are still dependent on your income. You pay apremium and, your beneficiaries are paid a death benefit if you die while the policy is active.

The death benefit is set when you purchase the policy, and the benefit amount should be enough to cover your family’s immediate and future expenses, including a mortgage, children’s education, and even a taxable account for your spouse’s retirement.

But not everyone needs life insurance.

Some people have enough assets to self-insure, which means their dependents will be financially secure without their income. Having a self-funded financial safety plan instead of a life insurance policy makes sense if you have enough cash and assets to cover everything your dependents may need. Self-insurance is possible mainly for people with high net worths or few expenses.

Your life insurance needs will change over time, so 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 probably don't 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, it’s useful to use a life insurance calculator, which can help determine future and present expenses.

Depending on your family situation, the amount your loved ones need could be as low as a few thousand dollars for a funeral or as high as millions of dollars to account for multiple mortgages, tuition needs for children, retirement needs for your spouse, and more.

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 

What are the advantages of self-insurance?

Self-insurance makes sense if you don’t need to rely on life insurance to protect your family financially if you die. If you can manage without it, you may save time and money by forgoing a life insurance policy.

Pros of self-insurance:

What are the disadvantages of self-insurance?

Even if you can afford to self-insure, it's important to consider the downsides.

Cons of self-insurance:

The biggest disadvantage of self-insurance is the lack of extra security. Even if you have ample assets, all it takes is one unexpected life event, medical bill, or market crash for your cash to be depleted. The advantages of life insurance outweigh the disadvantages for most people. Having a life insurance policy is generally an affordable way to protect your family from hardships, no matter what happens. 

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How term life insurance can help you be self-insured

For many, the path to being self-insured includes 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 (unless you have private student loans), you don’t typically have dependents or expenses to cover if you die, 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 manage your money wisely over the years.

A simple spreadsheet or a trusted app can help you build a budget that fits your lifestyle and still 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: So you can 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), use an IRA, and start saving with a 529 college savings plan so you have money earmarked specifically for education

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 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 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.

Self-insurance FAQs

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. People with high net worths and older individuals with minimal expenses or dependents might be able to self-insure. 

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.