Why Self Insure?

In its simplest form, insurance is a method of pooling resources to fund a certain risk when an individual’s existing assets are not sufficient to cover that risk. There are costs for administering these pooled risks, the same as insurance companies charge to insure and administer mortality risks. The first person to use the pooled money pays in the least and gets the most benefit. Many people intuitively understand that if they are the one left in the pool at the end, their money could have been invested more efficiently than having paid it into the pool(or to the insurance company). Life insurance acts no different as a pooled risk. Many people assume, usually because it is what they have been taught, that everyone who buys life insurance is buying dollars paid at death at a greatly leveraged discount rate. Nothing could be further from the truth. The discount depends entirely on when death occurs in relation to both expected mortality and to the others in the pool. Think about it. If everyone who buys life insurance came out ahead, how could the insurance company survive much less make a profit? Someone has to pay for the ones who die early. The only way that everyone’s life insurance policy could produce a highly leveraged payoff at death would be if Insurance companies had a secret formula to invest at tremendous gains that no one else could match. This is not the case, as evidenced by the 2008 crash resulting in many insurance companies’ portfolios dropping so drastically that they almost lost their charters to act as insurance companies because of a lack of capital reserves. Life Insurance’s purpose is to provide timely liquidity, but not discounted dollars for all. People who die early get a discount while those who live far enough beyond expected mortality do not (as defined by current mortality tables in use at any given time).

It takes a long time gathering and researching data to develop mortality tables. People are living longer at a dramatic rate. Mortality tables used by the industry in pricing policies tend to lag 10 to 20 years behind and are outdated even by the time they are adopted, so many people outlive the current tables in use.in the marketplace. Wealthy people also tend to outlive the average person’s mortality so they are especially vulnerable to living past the expected mortality of the average person, and therefore have an even greater chance that buying life insurance would not prove to be a profitable long term investment.

The large estate creates additional problems that can be solved by Self Insuring. Traditional life insurance strategies for large estates may require high premiums to be paid for by the next generation. The after income and gift tax cash flow required to pay these premiums is very burdensome. Sometimes large amounts of insurance can exceed the limits of how much insurance companies will even issue. Sometimes there are insurability problems. In many of these cases, self insuring is the only alternative. There are many advantages of Self Insuring such as:

• Tremendous possible cost savings.
• Possible reduction of current life insurance premiums, even to zero.
• Access to more cash along the way in case the need for the liquidity becomes irrelevant, such as a large reduction in the estate value.
• Removes the worry about what's going to happen to your current insurance such as:
  • Will it explode and lapse?
  • Is it overfunded?
  • Is it underfunded?
  • Will I pay in more than the beneficiaries get back if I live long enough?
  • What happens if I use the money in it?
  • Are there any tricks or traps that were not disclosed or I did not understand resulting in the policies not being there decades from now when I need it?

Therefore, self-insuring if you live long enough becomes the least expensive way to cover the liquidity needed at death. Deciding to what degree an estate can be self insured can be determined and managed by a risk management analysis using the formal process of the FutureSystemTM Planning Strategies.