Being Self Insured is the way to Secure and build generational wealth.

When it comes to financial planning, most people automatically think of life insurance as the primary way to protect their families after they’re gone. But what if I told you there’s another approach? A strategy that lets you take full control of your money, potentially grow your wealth, and avoid the hefty premiums of traditional life insurance. It’s called self-insuring. In this post, I’ll explore the concept of self-insuring versus life insurance to help you decide which is the smarter option for your financial future.

What is Life Insurance?

Let’s start with the basics. Life insurance is a contract between you and an insurance company. You pay regular premiums, and in exchange, the insurer promises to pay a lump sum to your beneficiaries when you die. This sounds straightforward, but there are several factors to consider, including the type of life insurance (term vs. whole life), the cost of premiums, and whether or not you’ll actually need such coverage over the long term.

• Term Life Insurance: Covers you for a specific period (10, 20, 30 years). If you outlive the term, the coverage ends, and you don’t get any money back.
• Whole Life Insurance: Provides coverage for your entire life, with an investment component that grows over time. However, it comes with significantly higher premiums.

What are the odds that life insurance will have to payout?

1. Term Life Insurance

• Typical Length: 10, 20, or 30 years
• Odds of Payout: Very low (estimated around 1-3%).

Most term life insurance policies do not result in a payout because the insured person outlives the term of the policy. For example, if someone takes out a 20-year term policy in their 30s and stays healthy, they are likely to outlive the policy term. According to the American Council of Life Insurers (ACLI), the vast majority of term policies expire without a death claim, which explains the relatively low premiums. (Insurance company’s are well aware of this, hence the reason they offer these policies)

2. Whole Life Insurance

• Coverage Length: For life (as long as premiums are paid).
• Odds of Payout: Nearly 100% (assuming the policyholder continues to pay premiums).

Whole life insurance is guaranteed to pay out eventually, since the coverage lasts for the insured’s entire life. This makes the odds of a payout much higher, but the cost is significantly greater than term life insurance because the insurer knows it will eventually have to pay out the death benefit. (Whole Life Pays 100% of the time but at what cost?)

Looking closer at Whole life insurance, do people typically pay more in Premiums vs. the Actual payout?

Yes, in many cases, people end up paying more in whole life insurance premiums over their lifetime than the actual payout they or their beneficiaries receive. Let’s see why this happens:

Whole Life Insurance Premiums

Whole life insurance is a type of permanent life insurance that provides coverage for the entire life of the insured, as long as premiums are paid. These policies also include a cash value component, which grows over time. However, the premiums for whole life insurance are typically much higher than those for term life insurance because:

• Coverage is guaranteed for life.
• The policy includes a forced savings (cash value) component.
• The insurance company has to guarantee a payout eventually.

Whole life premiums are often 5-10 times higher than term insurance premiums, depending on the individual’s age, health, and the size of the death benefit.

Lifetime Premium Costs vs. Death Benefit

If you have a whole life policy, especially one purchased at a younger age, you could end up paying premiums for decades. Here’s an example breakdown:

• Suppose you buy a $500,000 whole life insurance policy at age 30 with annual premiums of $4,000.
• If you live until 85, you will have paid 55 years’ worth of premiums, totaling $220,000.

Even though the death benefit is $500,000, you’ve invested a substantial amount of money into the policy over time. In some cases, depending on the length of the policy and premium payments, the total amount paid in premiums can rival or exceed the death benefit itself, especially if you buy whole life insurance at an older age with higher premiums.

Cash Value Consideration

One of the key selling points of whole life insurance is the cash value component. Part of your premium goes into a savings or investment account that grows tax-deferred over time. You can borrow against or withdraw from this cash value while you’re alive, which can offer benefits like emergency liquidity or supplemental retirement income.

However, accessing this cash value can come with caveats:

• Loans against the cash value need to be repaid with interest, or they reduce the death benefit.
• Surrendering the policy (cashing it out) may come with penalties, taxes, and a significant reduction in value.

Over a long period, the return on the cash value component is often relatively low compared to other investments, such as stocks or mutual funds, meaning that the forced savings aspect may not be as lucrative as other strategies.

Actual Payout vs. Total Cost

In practice, many policyholders pay significantly more in premiums over time compared to what they would receive if they had invested those same premiums elsewhere. For instance:

• If instead of paying $4,000 per year in premiums, the policyholder invested that same amount into a diversified portfolio, the compounding returns could result in far more than the $500,000 payout the insurance company guarantees.
• Over 30 years, with an 8% average annual return, $4,000 invested annually could grow to over $500,000 without needing life insurance to reach that amount.

Surrendering the Policy

Many people don’t hold their whole life policies until death. Studies show that a large number of policyholders surrender their policies after 10-20 years, either because the premiums become unaffordable or because they prefer to access the cash value. In these cases:

• The policyholder often gets less money back than what they’ve paid in, especially in the early years.
• They lose out on the full death benefit, which can make whole life insurance a less-than-ideal investment.

Do People Pay More in Premiums Than the Payout?

Yes, in many cases, the total premiums paid on a whole life insurance policy can add up to a significant portion of, or even exceed, the death benefit. While whole life insurance does provide lifelong coverage and a cash value feature, it may not always be the most efficient use of money for wealth-building purposes compared to other investment options.

Whole life insurance can still make sense for people who:

• Want guaranteed life-long coverage.
• Need estate planning tools, such as transferring wealth or covering estate taxes.
• Value the forced savings component and don’t trust themselves to invest or save on their own.

However, for others, especially those looking to maximize investment returns, alternative strategies like self-insuring or using term life insurance and investing the difference in premiums elsewhere may offer a better financial outcome.

OK I get it, what about Self insurance? How do I take ownership of my financial future?

1. Determine the Target Amount

• First, estimate the amount your family would need to be financially secure if something happened to you. This could include:
  • Income replacement: Enough to cover your family’s needs for a specific period, often calculated at 5-10 years’ worth of salary.
  • Debt coverage: Enough to pay off mortgages, loans, or other debts.
  • Future expenses: Include education, healthcare, and other foreseeable costs.

Let’s assume you aim to self-insure with a target amount of $500,000.

2. Create a Self-Insurance Investment Plan

To reach that $500,000 target, establish a dedicated investment account for self-insuring. Here’s a sample approach:

• Initial Deposit: Start with an initial deposit if possible—say, $10,000.
• Monthly Contributions: Contribute $500 per month consistently.
• Investment Strategy: Aim for a balanced portfolio with a mix of stocks and bonds to target an annual return of around 6-8% (reasonable for a long-term, diversified portfolio).

3. Leverage Compound Growth Over Time

Here’s what the growth could look like over 20 years with disciplined saving and investing:

• With a 6% annual return, you’d accumulate approximately $275,000.
• With an 8% annual return, you’d accumulate closer to $370,000.

If you start younger, say in your 30s, you can achieve this goal over 30 years, which would get you much closer to or even over the $500,000 mark, thanks to the power of compound interest.

4. Build an Emergency Fund and Backup Plan

Self-insuring doesn’t mean you shouldn’t prepare for emergencies. Establish a 6-12 month emergency fund to cover unexpected costs. This ensures that if any financial hardship arises, your self-insurance investment stays intact.

5. Use a High-Yield Investment Account for Flexibility

Keep your self-insurance account separate from other savings and investment accounts. Opt for a high-yield investment account where you can reinvest dividends and take advantage of compound growth. Avoid dipping into it for non-emergencies so that it continues to grow toward your target.

6. Monitor and Adjust as Needed

As life changes (family growth, income increases, or new debts), you might need to adjust your target amount or monthly contributions. Review your self-insurance strategy every few years to ensure it aligns with your goals.

Final Self-Insurance Portfolio Example

In this scenario:

• Goal: $500,000
• Strategy: Invest $10,000 initially, contribute $500 monthly, with a diversified portfolio aiming for 6-8% annual returns.
• Timeline: 20-30 years, depending on your age and other factors.

With this approach you have a guaranteed fund, live or die, that can be invested into other assets for your family such as real estate, tuition funds, businesses, etc. In fact, this fund can grow as your family grows, as they can all become contributing members. You are in the driver’s seat and not just donating to a “for profit system” that knows the likelihood of needing to pay is very slim. Protect your family and your future, and create generational wealth in the process.