Most breadwinners want to make sure that their family continues to live a comfortable life after they're gone. One of the best ways to accomplish this is by getting a life insurance policy. This is a risk management vehicle that pays out a sum of money if you pass away within the coverage period.
But working with a life insurance company isn't the only way to make sure that your family stays financially secure after you're gone. One of your options is self-insurance, which involves having enough assets and investments so that your family has a healthy cash flow after your death.
In this guide, we'll talk about how self-insurance works, and we'll also contrast and compare it against purchasing a traditional life insurance policy.
Self-Insurance vs Traditional Insurance
The easiest way to understand self-insurance is by comparing it against traditional life insurance policies.
Buying traditional life insurance means entering into a contract with an insurer. You pay them a sum of money (called insurance premiums) monthly or annually, in exchange for life insurance coverage.
If you pass away within the coverage period, then your beneficiaries (such as your spouse or your children) can claim a death benefit from the life insurance company. The death benefit can range from $5,000 to $1,000,000.
Self-insurance works quite differently compared to buying a policy. Instead of paying insurance premiums, you'll instead set aside that money to build up your savings and investments.
Once you have enough assets to ensure that your dependents will be financially secure after you pass away, you're considered self-insured. They can then use money from your investments to cover their daily living expenses, fund their education, and more.
Is It Possible For You To Get Self-Insured?
There's a formula that can help you tell if it's possible for you to be self-insured. Start by comparing the amount of money your family needs after you die against the value of your liquid assets.
To learn the amount of money your family needs after you're gone, you need to think about their current and future expenses. This typically includes the following:
Retirement fund for your spouse
Once you've determined how much money your family needs, you can start checking the value of your liquid assets. This refers to something you own that can be quickly converted into cash while retaining its value. These assets include the following:
Checking or savings accounts
Money market funds
A retiree with no debts and enough savings and investments for the next decade or more can be considered self-insured.
A young parent who is still paying off their mortgage may need to turn to traditional life insurance. Once they're out of debt and after their children have become financially independent, they can then become self-insured.
It's always wise to consult your financial planner to know if you can self-insure. They can also teach you how you can self-insure in the future, even if you need to rely on traditional insurance today.
Steps To Getting Self-Insured
Self-insuring isn't complicated, but it requires a lot of discipline and planning. Here is a step-by-step guide to save and earn enough money to self-insure in the future.
1. Save $1,000 For A Starter Emergency Fund
Starting small can get you into the habit of saving money. This can be as simple as setting aside $1,000 for emergencies. Doing this will prevent you from borrowing money whenever there's an emergency.
2. Pay Off Your Debt
It's important to knock out your debts one by one. You can try the debt snowball method to pay off your car, credit cards, and student loans.
3. Save Money To Cover 3-6 Months' Worth Of Expenses
Once you've paid off your debts, you'll be able to save more money. Save enough to cover 3-6 months' worth of expenses so that you can stay financially afloat in case something unexpected happens.
4. Start Investing
After you've paid off debt and have saved up some cash, you can begin investing. Take a percentage of your income and put it into a 401(k), a Roth IRA, or a 529 college savings plan.
5. Pay Off Your Home
This is the last and most difficult step. Once you've started earning from your investments, you can start setting aside more money to pay off your mortgage early. Paying off your home early won't just free you from debt; it can also save you thousands of dollars in interest.
Benefits Of Self-Insurance
Aside from gaining peace of mind, being self-insured comes with several benefits. These include the following:
1. No Need To Pay Insurance Premiums
If you self-insure, you don't have to pay premiums to insurance companies monthly or annually. You get to save money and focus on investing.
2. You Call The Shots With Your Investments
Insurers take premiums from insurance policies and invest them in different ways. Unfortunately, that also means you don't have much control as to how much your account can grow and earn interest.
If you self-insure, you get to decide on your own investment strategy. This will allow you to earn more depending on how well your investments perform.
3. Live Comfortably In Retirement
Self-funding your insurance policy means you wouldn't have too many financial obligations in retirement. You'll have enough investments to have enough cash, even without income from an employer.
Tips For Self-Insuring
Self-insuring isn't easy, but it's the way to go if you want financial freedom. Here are some tips you can follow if you want to achieve this goal.
Set And Stick To A Budget
Setting a budget that fits your lifestyle is the key to self-insuring. Make sure you're not wasting your income needlessly such that you have nothing left in your retirement years.
If you're having trouble staying within your budget, you can try using spreadsheets or budgeting apps. These will help you get a clear picture of where your income is going each month.
It's easier to self-insure if you start taking the necessary steps while you're young. Starting later in life might not give you enough time to let your investments grow to the amount it needs to be.
Every investment carries a risk. One way you can protect yourself is by diversifying, which means putting your money in different investment accounts. That way, you can avoid massive losses in case one of your investments doesn't yield the results you're looking for.
There are no strict rules for investing, but here are some things you can try:
Make short-term investments that you can access quickly in case of emergency.
Invest part of your money in long-term accounts that you can let sit for years.
Contribute to retirement accounts (401k).
Contribute to a college savings plan.
Avoid Self-Insuring Other Types Of Insurance
Even though you can self-insure life insurance, you can't do this for other types of insurance products. These are the types of insurance you should always have:
A health insurance policy: A single hospital stay can last 4.6 days and can cost you $11,700. You wouldn't want to be paying this out-of-pocket. Having comprehensive health insurance can help you avoid this risk.
Disability insurance coverage: Even if you have health insurance, it's also good to supplement it with disability insurance coverage. This will replace part of your income in case you become disabled and unable to work.
Car insurance policy: Car insurance is mandatory in most states. It will prevent you from spending out-of-pocket if you get into a car accident and need to pay for repairs and legal fees.
Home insurance plan: The costs of repairing your house after a disaster like a fire or a flood can be very expensive – it may even leave you in debt. The losses can easily eat away your investments and prevent you from being self-insured in the future.
Self-insured life insurance means being your own insurance provider. You'll need to save enough money and invest in different ways so that your family can live comfortably even after you are no longer there to provide for them.
If you want to learn more about traditional or self-insured life insurance, get in touch with Wesley Insurance, LLC.