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Self-Insurance: How It Works and When You Need It

Self-Insurance: How It Works and When You Need It

5 Minute Read

When it comes to insurance, it seems like the journey’s never over. You hear about another type of coverage you need, and you’re pulled into an endless, money-draining exercise!

But here’s the thing: Did you know you could be your own insurance provider by becoming self-insured? No more unnecessary insurance premiums or jargon—just you, your savings and investments and a whole lot of peace of mind.

So, how do you get to being self-insured, and what should you self-insure?

Let’s dig in.

What Is Self-Insurance?

Being self-insured means that you would have enough money to pay for anything an insurance company would usually foot the bill for.

When it comes to life insurance, self-insurance means having enough in investments to bring in a healthy income for your loved ones after you’ve died. Your dependents would not need to worry about paying bills, putting food on the table, or anything else they’ve depended on your income for.

Now, before we go any further, this is not about making them rich! Self-insurance is about you working to become your own insurance provider. How? Say you have a term life insurance policy (which is the only type of life insurance we recommend) that lasted 20 years.

Protect your family with term life insurance. Get a quote now!

If you worked during those 20 years to pay off debt and build up your investments, then by the time the term came to an end, you wouldn’t need life insurance because you’d be self-insured.

How Does Self-Insurance Work?

If you’re debt-free and have enough in savings, investments and assets to ensure your family can live off the income generated by them, then you’re self-insured.

But what does this look like with the numbers? Let’s look at some examples.

Annual income

How much to aim for
in savings/investments

How much a 10% annual
return will generate





Now, let’s look at someone whose income is higher.

Annual income

How much to aim for
in savings/investments

How much a 10% annual
return will generate





If those numbers fill you with panic, don’t worry—the stage of life that your family is in makes a big difference in how much you need in order to consider yourself self-insured. If the kids have left home and no longer rely on your income (and you’re completely debt free), then your spouse won’t need as much to get by.

Benefits of Self-Insurance

1. You’re paying less in premiums every year.

If you’re self-insured, you’re not paying an insurance company every year to carry the risk of insuring you. That’s a huge benefit to you, because you’re saving money! And we’re all about saving money where we can—especially on insurance premiums.

2. You’re financially independent when it comes to your investments.

Saving money on insurance premiums means you have more money to put into investments. And if they’re good investments (like a mutual fund), then that’s even better!

3. You can raise your deductibles.

Being self-insured means you can feel confident about raising the deductibles on the insurance you can’t avoid, like your auto, home and health insurance. If you raise a deductible, your premium will go down because you’re agreeing to pay more out of pocket toward a claim.   

Which Types of Insurance Should I Not Self-Insure?

These are the types of insurance you should always have in place:

Car Insurance

Car insurance is a mandatory requirement in pretty much every state. So, you’d be breaking the law if you didn’t have some kind of insurance for your car. But the main reason to have car insurance is to protect you if you’re in an accident and to protect your wallet if you’re faced with hefty legal costs from another party who wants to sue you.

Home Insurance

Home insurance is important to have, but it’s hard to self-insure. The costs of repair after a fire, flood or any kind of damage to your home would be through the roof! Your home is an asset—and one you want to protect with home insurance. And don’t forget: Lots of home insurance policies come with legal liability protection in case someone has an accident in your home and decided to sue.

Health Insurance

Don’t self-insure for health insurance—and not just because The Affordable Care Act made it a requirement to have some kind of minimum essential coverage in place. You need health insurance, because if you’re struck down by a serious illness, then the medical bills could be unaffordable without coverage.  

When Should I Self-Insure?

You should aim to self-insure your life insurance. Life insurance is there to protect your income, and that should be its only job. Once you’re out of debt and investing like a pro, you can work your way to self-insuring your income. This one makes sense!   

Self-insuring your life insurance should happen when you can afford to do so and when you’re debt-free. Most people will think about self-insurance when they’re approaching retirement or when their term life insurance is coming to an end.

As you build up to self-insurance, you can follow our Baby Steps. They’ll help you work your way out of debt, budget for an emergency fund of 3–6 months of expenses, put 15% of your household income in investments, and build wealth by investing in a good growth mutual fund with a return on investment around 10%.      

If you’re not quite self-insured, then get a term life insurance plan lasting 15–20 years and coverage that’s 10–12 times your annual salary. You’ll have the income protection you need, and your loved ones will be covered while you work your way to becoming self-insured!

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