Self-Insurance: How It Works and When You Need It – Ramsey
Insurance can feel like a never-ending journey. Just when you think you’ve got all the coverage you need, another type of insurance pops up, draining your hard-earned money. But hold on! Did you know that you can actually become your own insurance provider? Say goodbye to unnecessary premiums and confusing jargon, and say hello to self-insurance. It’s all about you, your savings, investments, and a whole lot of peace of mind.
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What is Self-Insurance?
Self-insurance means having enough funds to cover expenses that would typically be paid by an insurance company. When it comes to life insurance, self-insurance ensures that your loved ones will be financially secure after your passing. They won’t have to worry about bills, food, or anything else that relied on your income.
Reading: How to get self insurance
Now, let’s clear something up. Self-insurance isn’t about getting rich. It’s about working towards becoming your own insurance provider. Imagine this: you have a term life insurance policy that lasts for 20 years. During those 20 years, you diligently pay off debt and increase your investments. By the time the term ends, you’ll be self-insured and won’t need life insurance anymore.
How Does Self-Insurance Work?
If you’re debt-free and have enough savings, investments, and assets to support your family’s financial needs, then congratulations, you’re self-insured! But let’s dive deeper and look at some numbers to make it clearer.
| Annual Income | Savings/Investments Goal | Annual Return |
|---|---|---|
| $50,000 | $500,000 | $50,000 |
| $80,000 | $800,000 | $80,000 |
Don’t panic if these numbers seem daunting. Your family’s stage of life plays a significant role in determining how much you need to be self-insured. If your kids have flown the nest and are no longer dependent on your income, and if you’re debt-free, your spouse won’t require as much to maintain their lifestyle.
Benefits of Self-Insurance
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Let’s explore why self-insurance is a game-changer:
1. You Save on Premiums
As a self-insured individual, you no longer have to pay insurance companies hefty premiums every year. That’s money saved! It’s always a win when you can cut costs, especially on insurance premiums.
2. Financial Independence
By reducing your insurance premiums, you have more funds available for investments. If those investments perform well (think mutual funds!), you’ll be even better off financially.
3. Higher Deductibles
Being self-insured empowers you to raise deductibles on unavoidable insurance, such as auto, home, and health insurance. When you increase the deductible, your premium goes down because you agree to pay more out of pocket for a claim.
What Types of Insurance Shouldn’t You Self-Insure?
While self-insurance is great, some types of insurance are best left to the professionals. Here are three types you should never self-insure:
Car Insurance
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Car insurance is often a legal requirement, so not having it could land you in trouble. Additionally, car insurance protects you in case of accidents and shields your wallet from hefty legal costs if someone sues you.
Home Insurance
Self-insuring home insurance is challenging because repair costs after disasters like fires or floods can be astronomical. Your home is an asset that deserves protection, and home insurance provides that peace of mind. Keep in mind that many policies also include liability protection in case someone gets injured while visiting your home.
Medical Insurance
Never skip out on health insurance, not only because it’s often mandatory but also because medical bills can quickly become unmanageable without coverage. Your health is priceless, so make sure you have suitable insurance in place.
When Should You Self-Insure?
When it comes to life insurance, self-insurance should be your goal. Your life insurance’s main purpose is income protection, and self-insurance aligns perfectly with that objective. Once you’re debt-free and investing wisely, you can start working towards self-insuring your income. It’s a logical step!
Most people consider self-insurance as they approach retirement or when their term life insurance is about to expire. As you transition towards self-insurance, follow our small steps. These steps will guide you out of debt, help you build an emergency fund covering 3-6 months of expenses, enable you to invest 15% of your household income, and accumulate wealth through well-performing mutual funds with an average return of around 10%.
A term life insurance plan that lasts 15 to 20 years, with coverage of 10 to 12 times your annual salary, provides the income protection you need. As you work towards becoming self-insured, your loved ones will be covered. However, if you’re unsure about embarking on this journey alone, we recommend exploring Zander Insurance, a reliable provider chosen by Ramsey. Don’t wait another day to ensure your protection. Get started by obtaining term life insurance quotes today.
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