Author Topic: Self-Insuring - When Does It Make Sense?  (Read 5193 times)

mr_orange

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Self-Insuring - When Does It Make Sense?
« on: June 28, 2015, 01:31:24 PM »
I was wondering what people's thoughts were about dropping insurance coverage past some point in wealth.  What is your approach to this?

Term life insurance isn't extremely expensive, but the dollars do add up.  We're a lot wealthier now than we were when we purchased the insurance years ago.  At what point does it make sense to drop term insurance if you have kids and a nice stache built up?

Comments about property or other insurance are certainly welcome as well. 

My general philosophy has been to insure for catastrophic losses and avoid insurance on things that we could cover even if they're painful.  So things like medical insurance are must-haves.  Any general thoughts on this?

Spork

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Re: Self-Insuring - When Does It Make Sense?
« Reply #1 on: June 28, 2015, 01:35:58 PM »

My general philosophy has been to insure for catastrophic losses and avoid insurance on things that we could cover even if they're painful.  So things like medical insurance are must-haves.  Any general thoughts on this?

Yep: That about sums it up for me.
* medical: yes
* liability: sadly in our litigious society, yes
* home: yes
* term life for young family: yes

For me, pretty much all else is "no".  There are oddball edge cases where it makes sense... and likely scenarios I'm not thinking of.  (Long term care, for example, I'm on the fence with.)

clifp

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Re: Self-Insuring - When Does It Make Sense?
« Reply #2 on: June 28, 2015, 02:19:52 PM »
Medical Yes its the law
Auto Yes liability only
Homeowners Yes pretty cheap and very costly to replace a home.

Everything else no.

Term it certainly depends.  Don't most companies provide 2-5x your salary worth of term life insurance as an employee benefit. I always got it.
If you have several kids and SAHM mom than I can certainly understanding having a more extensive policy.  But as you get closer to FI and the kids get into high school, I'd say drop it.

forummm

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Re: Self-Insuring - When Does It Make Sense?
« Reply #3 on: June 28, 2015, 02:34:49 PM »
Medical Yes its the law
Auto Yes liability only
Homeowners Yes pretty cheap and very costly to replace a home.

Everything else no.

mr_orange

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Re: Self-Insuring - When Does It Make Sense?
« Reply #4 on: June 28, 2015, 02:58:10 PM »
If you have several kids and SAHM mom than I can certainly understanding having a more extensive policy.  But as you get closer to FI and the kids get into high school, I'd say drop it.

What about if your kids are young, but you have already amassed a lot of wealth? 

My wife works, but the scenario I am afraid of is if we BOTH die in a car wreck or any other accident. 

Paul der Krake

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Re: Self-Insuring - When Does It Make Sense?
« Reply #5 on: June 28, 2015, 03:01:18 PM »
If you have several kids and SAHM mom than I can certainly understanding having a more extensive policy.  But as you get closer to FI and the kids get into high school, I'd say drop it.

What about if your kids are young, but you have already amassed a lot of wealth? 

My wife works, but the scenario I am afraid of is if we BOTH die in a car wreck or any other accident. 
You can always leave instructions for the would-be guardians on how to manage the wealth. Whether they would actually follow it is another story.

mr_orange

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Re: Self-Insuring - When Does It Make Sense?
« Reply #6 on: June 28, 2015, 03:02:55 PM »
My wife has a twin sister.  If we both died she and her husband would get the kids and I'm pretty sure they'd be well-off with the wealth we currently have.  I'm really considering dropping the term coverage soon. 

clifp

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Re: Self-Insuring - When Does It Make Sense?
« Reply #7 on: June 28, 2015, 03:38:38 PM »
My wife has a twin sister.  If we both died she and her husband would get the kids and I'm pretty sure they'd be well-off with the wealth we currently have.  I'm really considering dropping the term coverage soon.

Yes I'd drop it.  I don't have kids, but if I did I'd want to provide them with a college education at good public school. Beyond that they are on their own.

mr_orange

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Re: Self-Insuring - When Does It Make Sense?
« Reply #8 on: June 28, 2015, 03:48:32 PM »
Yup....trying to understand the logic of keeping it if any exists.  We could more than cover their college and the wealth difference would surely cover their living costs for another 13 - 16 years (they're 5, 2, and 2). 

Another Reader

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Re: Self-Insuring - When Does It Make Sense?
« Reply #9 on: June 28, 2015, 05:29:54 PM »
Much of your wealth is tied up in complex assets that requite a sophisticated knowledge of real estate and financing to manage.  Are your BIL and SIL knowledgeable and capable of managing these assets?  Would they be able to manage the portfolio during a big downturn in the market with no liquidity?  Do they have the necessary connections to manage and sell the assets?  What happens if you both die during the construction phase of a major project?

This is a situation where the life insurance would provide substantial cash that would get them through a difficult period while they get up to speed or deal with a liquidity event.  Or it could keep them from liquidating assets in a down market at fire sale prices to pay college expenses.  Until you have sufficient cash and traditional paper assets to see the guardians through a difficult period, I would keep enough of the insurance to cover liquidity needs and the cost of a few years of child rearing plus something for their education.


mr_orange

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Re: Self-Insuring - When Does It Make Sense?
« Reply #10 on: June 28, 2015, 06:17:17 PM »
Much of your wealth is tied up in complex assets that requite a sophisticated knowledge of real estate and financing to manage.  Are your BIL and SIL knowledgeable and capable of managing these assets?  Would they be able to manage the portfolio during a big downturn in the market with no liquidity?  Do they have the necessary connections to manage and sell the assets?  What happens if you both die during the construction phase of a major project?

They wouldn't, but I have a partner in our development company that could.  In order for them to be saddled with all of this responsibility my business partner, my wife, and I would all have to be killed at the same time.  This is very unlikely because we very seldom hang out together outside of work. 

Our projects have pretty large margins and could be sold at break-even or better during a crisis unless the Austin market all of a sudden turns into Detroit.  This could happen, but it is very unlikely. 

Quote
This is a situation where the life insurance would provide substantial cash that would get them through a difficult period while they get up to speed or deal with a liquidity event.  Or it could keep them from liquidating assets in a down market at fire sale prices to pay college expenses.  Until you have sufficient cash and traditional paper assets to see the guardians through a difficult period, I would keep enough of the insurance to cover liquidity needs and the cost of a few years of child rearing plus something for their education.
We have about $550k in perfectly liquid assets right now and a lot of equity in rentals that could be converted to cash.  At the end of this year that will be closer to $1M.  At some point it just seems like the term insurance is not a good value. 

We'd really want $300k ($100k each) for college plus enough cash to have the kids not be a burden on family if we die.  I'm not sure how much cash this translates to, but we should be in the ballpark later this year.  Any thoughts on that?

Gin1984

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Re: Self-Insuring - When Does It Make Sense?
« Reply #11 on: June 28, 2015, 06:41:04 PM »
Also, keep in mine that if you die the kids will get social security until they hit 18.  That is a insurance that comes with your FICA payments.

mr_orange

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Re: Self-Insuring - When Does It Make Sense?
« Reply #12 on: June 28, 2015, 06:42:27 PM »
Also, keep in mine that if you die the kids will get social security until they hit 18.  That is a insurance that comes with your FICA payments.

Thanks.  I didn't know that. 

My parents are both still alive right now too as are my wife's parents.  I find it hard to believe they'd struggle with all of the family support, but I certainly wouldn't want to put extra strain on the family if we died. 

mustachepungoeshere

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Re: Self-Insuring - When Does It Make Sense?
« Reply #13 on: June 28, 2015, 11:22:24 PM »
(sig) “The brick walls are there for a reason. The brick walls are not there to keep us out. The brick walls are there to give us a chance to show how badly we want something. Because the brick walls are there to stop the people who don’t want it badly enough. They’re there to stop the other people.”

Love these words by Randy Pausch. Thanks, mr_orange, you've just brightened my day.

mr_orange

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Re: Self-Insuring - When Does It Make Sense?
« Reply #14 on: June 29, 2015, 04:59:29 AM »
You're welcome.  If you haven't done so already you should do a Google search for his last lecture and watch it.  It is well worth the time invested.