• Robyn Saito

Life Insurance vs. Self Insurance

Updated: Dec 29, 2021

Life insurance is a way to provide for your family if 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. 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 account 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.

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 assets. There would be 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.

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

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. On the other hand, a young parent may need millions of dollars in liquid cash to be sure her family would be taken care of in case she died.