Should you self-insure for life insurance?

If you've ever shopped for life insurance, you've probably asked yourself: Do I need this? Even if you're confident the answer is yes, there's a likelihood you've wondered how much of it you could cover on your own.

That's an understandable line of thinking. For many people, it's hard to see the actual value of life insurance. But think of forgoing life insurance like putting off a root canal. You figure if you brush your teeth just a little bit more, it will go away.

In both cases, taking matters into your own hands won't likely solve the problem. And if the worst-case scenario comes to a head, the outcome can be devastating if you're not proactive about dealing with it now.

What is self-insurance?

Let's look at self-insurance from a general insurance perspective before we dive into how it works for life insurance. In the insurance world, self-insuring means that instead of buying an insurance policy, you use your savings or investments to cover potential losses or risks.

In other words, if you're self-insured, you choose not to pay premiums to the insurance company and instead, you save or invest that money to cover the costs that your insurance proceeds would have covered.

How does self-insurance work for life insurance?

If you wanted to self-insure for life insurance, you would start by determining your life insurance needs. These needs might include outstanding debts, final expenses, income replacement, and other requirements, such as furthering your children's education. Upon calculating the total need, you would set aside funds in savings or investments to cover those costs.

After some quick math, it's easy to see that self-insuring for life insurance typically is only possible if you have a high net worth or significant savings, as it requires a substantial amount of money.

Speaking with a financial or life insurance professional is always recommended to find the best options for your individual needs.

Benefits of self-funded insurance

Some benefits of self-insurance include independence and flexibility through control, as well as potential cost savings.

For example, a life insurance policy is used to specifically protect your life, which is a very singular goal. Some types of permanent life insurance may offer flexibility through cash value elements. But that's not the same as utilizing standard savings or investment assets, which can be allocated toward other financial goals if the life insurance is unnecessary.

Additionally, you may feel you're saving money by not paying premiums to the insurance company. You prefer the idea of using those dollars to invest in yourself. And if you don't need life insurance, that may have been a good decision.

But this requires significant risk because you can't predict the future. Would you forgo health insurance and try to save money to cover your health care costs instead? Of course not, because unexpected medical costs are too high to run that risk. Would you opt out of car insurance? No, because it's legally required. Would you pass on home insurance? Not if you want a mortgage.

Life insurance should be no different. There are always exceptions to the rule, but when most people add up the costs their families would incur in case of their deaths, it immediately becomes clear that life insurance is necessary.

Is self-insurance right for you?

Consider self-insuring if you have a significant amount of savings and assets that can be used to cover unexpected expenses and debt obligations that your life insurance policy would typically cover. Here are some situations where it could make sense:

• You have a high net worth. If you have enough assets not allocated to other financial goals to cover any needs in case of an unexpected death, you may not have to rely on a life insurance policy. Consider the age of your dependents and your spouse's financial independence in this scenario. As your children age, they will likely rely less on you for financial support. Likewise, if your spouse is independently wealthy or generates significant income, they may not be as reliant on your income.
• You have few to zero financial obligations and no future liabilities. You may not need life insurance if you don't have any financial commitments, such as a mortgage or other large debts. It's also essential to consider your future financial plans. Just because you don't have a mortgage now doesn't mean you won't want one ten years from now.
• You have a terminal illness or can't qualify for life insurance. Unfortunately, there are some instances where you can't buy life insurance. Maybe you've tried to get it before and were declined due to your health history. Perhaps it's not affordable for you. Or, possibly, you can only qualify for a small amount of group life insurance or guaranteed issue coverage.

It's important to know that self-insuring is rare and is usually not advisable. Before going down the self-insurance path, consider your life insurance needs carefully and consult a financial advisor. These professionals can help ensure you make the right decision for your needs.