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Life Insurance or Self-Insurance: Which is right for me?
Allocating funds for the future is a great way to protect your loved ones and ensure they have financial support and stability. Life insurance is a common and valuable tool that can provide a safety net for your family in the event of your death. However, life insurance isn’t the only option. When planning ahead, you can also opt for another saving strategy: self-insurance. Rather than paying a premium toward an insurance policy, self-insurance involves acting as your own insurer by setting aside money to pay out-of-pocket for unexpected expenses. In this article, we’ll explore what life insurance and self-insurance are and the primary differences between them to help you make informed decisions for your financial future.
The Difference Between Life Insurance and Self-Insurance
To determine which type of financial coverage is right for you, it’s important to understand the differences between life insurance and self-insurance. Life insurance is purchased through a carrier that agrees to cover you for a certain amount as long as you pay your premiums. By paying a monthly rate, carriers guarantee your beneficiaries a particular amount of financial protection in the event of your death. To give an example, while you may spend $903 in premiums over the life of a 10-year term policy, your coverage amount is $250,000, offering your loved ones more in coverage than what you paid in monthly premiums.
Instead, self-insurance guarantees your loved ones the exact amount you set aside for emergencies. Self-insurance means you take responsibility for your own coverage by setting aside money in anticipation of different circumstances. For example, you may have a specific savings account to provide for your loved ones if you pass away unexpectedly. Unlike life insurance premiums, which are paid on a fixed schedule at a predetermined rate, self-insurance contributions can vary in amount and cadence.
Pros and Cons of Self-Insurance
When you’re deciding between life insurance and self-insurance, you’ll want to weigh the costs and benefits of both options. Here’s an overview of the pros and cons of self-insurance:
Advantages of Self-Insurance
- Without fixed premiums, you can contribute more or less depending on your income, life events, and schedule and pocket the money you would be spending on premiums.
- Since you’re in control of the money and where it lives, you can choose to invest it rather than using a simple savings account. This allows the balance to grow over time.
- By having control over if and when you make your monthly or annual contributions, you can avoid a policy lapse.
- Self-insurance allows you to avoid the life insurance application process, which can include a medical exam and underwriting.
Disadvantages of Self-Insurance
- With self-insurance, you may face estate, inheritance and other taxes deducted from your funds.
- Self-insurance offers less of a financial safety net than life insurance coverage, since a carrier will likely insure you for a higher amount than you actually contribute.
- Self-insurance is inherently more risky than life insurance, because you could easily deplete your savings on unanticipated expenses.
SelectQuote Can Help You Navigate Your Life Insurance Options
If you’re deciding between self-insurance and life insurance, you may benefit from consulting an expert to guide you through your options.That’s where SelectQuote can help.
Our licensed insurance agents have the knowledge and experience needed to help you make decisions about life insurance. In just minutes, we can search and compare life insurance quotes from the trusted carriers we work with, saving you the time of doing all that research on your own. And we’ll help quickly narrow down your policy options to find the coverage you need, at a price that works within your budget.
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