Financial Planning for Businesses

How To Self-Insure With Life Insurance: Part 1

I’m a big believer in not overpaying for insurance. That’s funny because part of what I do for a living is sell insurance so you’d think I’d be pushing people into buying more and more of the stuff, right? The truth is, I think there are many folks (maybe you too) who are “insurance poor.” Maybe you’re already  spending so much money insuring the things that matter to you most that you feel like you are giving most of your paycheck to an insurance company.

That may be true, and there is a way to reverse that. … and it requires that you buy MORE insurance. Isn’t that funny?

Let me explain. Let’s say you own a new car. And, in order to replace that car, it would cost you $20,000. Your goal is to build up a savings that is worth $20,000 and then make premium payments towards that pool of money that are equal to the premium payments that you are now giving to the insurance company for comprehensive and collision (this will involve a little financial planning, but it’s fairly easy to accomplish for nearly everyone). Obviously, you still have to keep liability coverage as that is state-mandated.

Where does the insurance part come in? Well, the only financial product on the market that is specifically designed to help you self-insure over time is cash value life insurance. Cash value insurance was initially just term insurance. But, customers got tired of paying term premiums and never seeing those dollars again, so insurance companies came up with a “cash value” component that would be designed to build up a reserve against the death benefit. Eventually, the death benefit would equal the cash value and presto, you have just self-insured.

The idea here is that you build up a reserve – not against the death benefit – but against your vehicle. When you fund a life insurance contract up front over a period of 4-5 years, you dramatically lower the cost of insurance, reduce the face amount to the IRS mandated minimums, and create a pool of money that grows tax deferred and can be accessed tax free. There aren’t too many products that can do that, and even fewer that will have such a low expense associated with them.

…and life insurance is the easiest option to get into. You don’t even need to be healthy to buy it (and cost isn’t even an issue when you use it to self-insure).

Once you’ve built up a reserve against your car, you will no longer need to carry the comp and collision. You can dump the coverage, and redirect your premium payments into your life policy which will just add to the money already in there. If you need to “file a claim” you don’t have to hassle with the insurance company, as getting access to your cash value is extremely easy. If you never file a claim, that money just sits there and grows at interest. Either way, you will never have to feel like your dollars are being “wasted.”

…and that is only the beginning.

How to self-insure with life insurance: part 2

January 8th, 2012 | by David | No Comments

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