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May 07, 2009


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I'd just add to what you said. Not only does the total funds needed increase, but it also decreases. I think it's kind of like a "bell curve" if you will. Early in life you're footloose and fancy-free, then you get married, have kids, buy a house. However as you get older you (hopefully) pay down your mortgage, your kids finish college, etc., and you don't have as much need.


I think this often applies to areas other than life insurance. Auto, home, etc. Most governments (city, state, fed) and many large corporations are self-insured on their automobiles, property, casualty, etc.

Essentially, because their pool of covered entities is large enough, and their capital on hand high enough, they are better off NOT paying insurance premiums to a third party, but rather, keeping that money in house and paying out claims as they occur.

Many "self-insured" companies will have reinsurance to cover any losses over a specified amount over a given period, ($1 million per year for example), so that they can limit their financial liability.

There is one LARGE aspect that you left out. Some people buy life insurance to insure against taxation. For families that have a net worth in excess of 1 million or more they may face the dreaded "death tax" where the IRS comes in and takes half of everything.

The IRS however does not touch life insurance proceeds when paid out so it's a hedge in some instances.

For 2009 the estate tax begins at 3.5 Million. The rate up to 3.5 Million is Zero. The rate above 3.5 Million is 45%.

That all changes next year unless Congress fixes it.

I will never be "self-insured" with regards to life insurance. There are too many benefits to having permanent (ie-not Term) life insurance for me to even consider it.

1. Tax-favored use of cash value to finance my lifestyle that allows me to pay interest to ME not a bank.
2. Tax free to my heirs on my death. Death Tax can be as high as 43%!!! see more here:
3. My policy dividend grows my cash value by 6% per year... Even last year when the market was down 30-40%!

Only about 3% of term policies ever pay a claim, meaning that 97% of dollars used to pay for term insurance is wasted!

Compare that to the 80% of whole life policies that pay out. It makes you re-think all of those things that some people accept as fact, like "Buy term and invest the difference". That may be right for some people, but if it isn't right for you, wouldn't you like to know that now?

We don't do this for life insurance, but we do this for car insurance; we have enough cash set aside to replace either of our cars if we need to. Because of this, we have liability coverage only on both of our cars (although we have a lot of liability with a $1.5M umbrella policy).

Another element of "self-insurance" is not buying extended warranties. If you have enough money to replace your electronic gadget, you're effectively self-insured and don't need an extended warranty.

Isn't being "self-insured" just a nicer way of saying you're uninsured? Use one term, you look smart and analytical. Use the other, you're a reckless vagrant. It's a very fine line between the two.

Mel --

It's not the same the way I've described it. If you notice, in my description you have enough to cover all your family's needs in case you die. Not quite my definition of "a reckless vagrant."

rxjohnk says: "Only about 3% of term policies ever pay a claim, meaning that 97% of dollars used to pay for term insurance is wasted!"
I think this is a gross misinterpretation of the relevance of insurance - which is nothing more than merging the art & science of probability...
The 3% policies that do pay out do not represent a mere 3% of premium paid in - the payout is based on sum assured, which is significantly higher than the premium (perhaps a multiple of 100 or so). 97% of dollars paid in compensate for the large payouts which are not in line with the premiums paid in. Of course, the insurance company's admin expenses & profits some out if this as well...

Foobarista is right on.

"Insurance" is a way to protect yourself against catastrophic loss that you can't afford. On average, you lose money paying into insurance, but it's worth losing a little to protect yourself from a crippling financial blow. But, IMO, it's not worth paying for insurance to cover "non-crippling" losses that you could actually afford just fine. Instead, just save up what you would've paid for insurance for various small-scale losses, and long-term you should come out ahead.

IMO, you generally should have life insurance, health insurance (not necessarily a "health plan", just catastrophic coverage), liability insurance (including auto insurance), and any other type of insurance required by law.

On the flip side, you should avoid buying insurance on consumer electronics (yeah, it sucks when your $300 stereo quits working, but it sucks even more to realize you've spent $1000 on insurance on similar types of electronics and only ever used it for the $300 stereo.)

In any case, you should make sure you have appropriate amounts of insurance. I recently realized I was paying $120 per month on collision/comprehensive on my 2 cars, which (based on expected replacement costs) means I'd have to total one car every four years to break even. Needless to say, I dropped that coverage and pocketed the savings. On the other hand, I made sure I had enough liability coverage that if I total someone's jaguar and put them in the hospital for a month, I'm not going to lose my life savings.

I have "heard" that instead of paying for liability insurance for your vehicle, you can post a bond for whatever the minimum amount of liability required. That way, YOU earn interest on your bond, not the insurance company. Anyone know different?

Michael --

Never heard of it. But maybe someone else has. I'll post you question in a week or so and see what others say. Stay tuned.

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