What is Self-Funded Life Insurance?

Welcome to my crazy world where Cash is King, Debt is Dumb, and ..... well, where Self-Insurance is Stupid.

For years I've heard so many people tell me that they don't need life insurance because they are now self-insured. What does that even mean? I've asked that very question to many with a variety of answers. What it appears to boil down to is the idea that you have enough cash, etc., saved that you can pay for your final expense needs out of pocket.

Well, let me be the first to say congratulations. However, I'm often skeptical when people tell me this because more often than not, when I meet people who have have money, they also have insurance, and lots of it.

The "self-insurance" approach, when it comes to life insurance, really doesn't make much sense when you understand how life insurance works. In fact, I'd say it's not the smartest financial move you could make and here's why.

Final Expenses

A 2021 study from the National Funeral Directors Association shows the median cost of an adult funeral with viewing and burial is $7,848, up 6.6% from 2016. That doesn't sound too bad but as the commercial says, but wait there's more. This price tag doesn't include the burial plot or urn vault ($1,213), it doesn't include the opening and closing of the grave or internment of the ashes ($1,000), it doesn't include the headstone or marker ($2,500). 

Keep in mind that 30 years ago the average cost of a funeral was $4,207 (not including plot, grave stone or opening/closing ground). That means funeral costs have increased 53% since 1992, if that pace continues, the average cost in 2052 will be $12,043 for just the basics. If the other items increased at the same rate, the total package would be around $19,218!

Okay, so let's look again at those costs ( $7,848 + $1,213 + $1,000 + $2,500) = $12,561. A cremation may be slightly less than this number but let's use the number for analysis. 

A Couple of Options

Let's suppose you are 50 years old now and have this money stored for your self-insurance / final expenses...
  1. Where are you keeping the money? Savings or CD's? If so, the money isn't growing fast, maybe at between .025% and 1% and then you have to pay taxes on that growth each year. This may be just enough to keep up with those increases over time.
  2. Where are you keeping the money? ROTH IRA? If so, your money is growing a little faster than a savings account or a CD. In addition, it's growing without having to pay taxes. Certainly not a terrible option. However, a ROTH limits your contributions. Do you really want to put your hard-earned money in a ROTH simply to be used to bury you. It seems like a waste or resources.

The Power of Life Insurance

Now let's look at Life Insurance. For our purposes, we're only going to focus on Single-Premium (one time payment) Policies since the money is already available and set aside as "self-insurance." 

Assuming an individual of 50 years of age passed the medical review (most likely a medical prescription check, motor vehicle check, doctor's records and an oral swab) the same $12,561 could provide an immediate death benefit of around $24,593. That's double the initial amount (probably won't happen with a ROTH) and all income tax free (unlike money in a savings or CD).

That's all if the individual died shortly after approval and issue. But what happens if this man lived another 36 years (based on IRS longevity table)? The death benefit at that point could be nearly $50,000 but never less than the original death benefit
of around $24,593.

So, the cash languishing in a CD could be placed in a Single-Premium policy and grow from $12,561 to nearly $50,000 of tax free benefit at death. This is a much smarter option and helps you make your money work for you rather than working hard at growing your money. I call this being "smart insured" instead of being self insured.

N.B. Single Premium policies are considered MECs (Modified Endowment Contracts) by the IRS. This means that the same rules apply to them that apply to qualified accounts like IRAs and Annuities - gains must be taken first and a 10% penalty may be applied if withdraws from the cash value are taken prior to age 59 1/2. Consult your agent for details.

Legal Information: Information and amounts listed are for entertainment and educational purposes only and do not represent any particular policy, company, rider, or persons.
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Phone: 740-324-0702

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