Can you self-insure instead of buying term life? Testing the claim

Some people can self-insure, and the idea is not a myth. A household whose savings and investments would, after taxes and the loss of the insured person's income, support the survivors for as long as they need support has little left for a term policy to cover. The trouble is that the claim is usually made by people who are not yet in that position. They have savings that are growing, a plan to invest what they save on premiums, and a belief that the numbers will have caught up by the time something goes wrong. The question that decides it is not how much you will have in 20 years but how much you have if the worst happens next year.

This post tests six versions of the claim. The figures are hypothetical, with round numbers chosen for clean arithmetic, and are not predictions or advice. For the basics of sizing coverage, see How much life insurance do I need?.

What you are comparing

Term life insurance and savings do different jobs, and the comparison only makes sense once that is clear.

• A term policy is a transfer of risk. For a modest premium, the insurer agrees to pay a large sum if you die within the term. The sum is available on day one of the policy, whether you have paid one premium or two hundred.
• Savings are an accumulation. They grow with time and contributions, and they are most useful in the later years. In the first years, they are small.
• The risk is the early death. The danger that makes people buy term is not dying at 85, when children are grown and savings have accumulated. It is dying at 40 with a mortgage and young children, when the savings have not had time to grow.

Self-insurance means holding enough money, in a form you could actually reach and use, to take the place of the policy. That is a high bar early in life and a lower one later. The needs analysis you would do for a policy is the same one you need to do here.

Claim 1: "My savings are bigger than my debts, so I'm covered"

The claim. Add up what you owe. If your savings are larger, there is nothing for insurance to do.

The test. Debts are only part of what a death costs a family. The larger part is usually lost income. A household that loses a paycheck loses it every year, and the mortgage is only one of the bills that keep arriving.

A worked example. Say a household has the following (all hypothetical):

• Savings and investments: $400,000.
• Mortgage balance: $250,000.
• The insured earns $90,000 a year; the surviving spouse earns $45,000.
• Household spending, after the loss, that must be covered: $85,000 a year.
• The survivor needs support for 18 years, until the youngest child finishes school and gets started.

If the insured dies, the household's income falls to the spouse's $45,000. The shortfall is $85,000 - $45,000 = $40,000 a year, or $720,000 over 18 years ($40,000 x 18), before any allowance for investment growth or inflation, and ignoring the child's education. Add the mortgage if the survivors want to keep the house: $720,000 + $250,000 = $970,000.

Against that, the savings are $400,000. They cover less than half. The household has savings larger than its debts ($400,000 > $250,000) and is still short by $570,000 ($970,000 - $400,000). Their "net worth" test said they were fine; the income test said they were not.

The guide on income replacement: the 10x rule and better ways shows the better ways to count this.

Verdict. Misleading. Compare your savings with the whole need, not just the debts.

Claim 2: "I'll invest the premium instead, and I'll end up ahead"

The claim. Instead of paying a term premium, put the same money in an account, and in 20 years you will have more than you paid.

The test. That is probably true in the case where nothing goes wrong. The question is what it does in the case where something does. Say a 20-year, $500,000 term policy costs an illustrative $45 a month ($540 a year), and the alternative is to invest $45 a month at an assumed 5% a year, compounded monthly. This table compares the two outcomes at different points, if the insured dies at that time:

If the insured lives to the end of the term, the investor is ahead by $18,500, while the term buyer has nothing to show except 20 years of protection. If the insured dies in year 3, the term buyer's family has $500,000 and the investor's family has about $1,750. The difference between those two outcomes is the whole reason insurance exists. Savings need time, and the risk does not wait for it.

You can see how the long-run comparison works in the buy term and invest the difference calculator, and the guide buy term and invest the difference: does it hold up covers the strategy fairly, including when it works. Note that this strategy is built on a policy: it is "buy term and invest the difference," not "skip term and invest." The term policy covers the years when the investments are too small.

Verdict. Partly true on the long run, and false on the early years, which are the ones that matter.

Claim 3: "Insurance is a bad bet on average, so I should skip it"

The claim. Insurers make a profit, so the average policyholder pays more than they collect. A smart person would not take that deal.

The test. The first half is true. Insurers cover their costs and earn a margin, so across all customers, premiums exceed claims. But the conclusion does not follow, because insurance is not bought as a bet on average outcomes. It is bought to remove a catastrophic outcome. The same logic would say never to insure a house, which is also a negative average bet, yet lenders require it and most owners would not drop it.

What matters is how bad the bad outcome would be, and whether you can absorb it. For a household in the example above, losing the insured's income without replacement would mean selling the house, cutting every plan and perhaps working extra jobs. For a household with ample wealth, the same loss would be uncomfortable but manageable. The right test is not the average, but the worst case you could not survive.

You can see how likely a person of your age is to die during a given term with the odds of outliving your term. The odds for younger adults are low, which is the reason the premium is low too. Low probability and high cost is the classic profile for insurance.

Verdict. The first half is true; the conclusion does not follow. Insurance is priced to trade a small certain cost for protection against a large uncertain one.

Claim 4: "My retirement accounts and my house are my coverage"

The claim. I have a 401(k), an IRA and a lot of equity in my house. If something happened, my family could use those.

The test. These are assets, but they are not equally available or equally useful.

• Retirement accounts. A balance in a tax-deferred account is not the same as cash. Withdrawals are generally taxed as income, and a survivor who withdraws early may face additional taxes or penalties depending on age and account type. They are also meant to fund the survivor's own retirement, so spending them on bills now creates a shortfall later. A $350,000 balance is not $350,000 of usable cash.
• Home equity. Using equity means selling the house, borrowing against it or both. A family in grief that needs to move because the income stopped is paying a second price. Borrowing requires an income to qualify and make payments, and the income is exactly what is missing.
• Timing. A death claim is a paperwork process that starts the day the claim is filed. Selling property or untangling accounts can take months and depends on markets and on probate. See probate for how estates are administered.

A quick adjustment. Say a household has $350,000 in retirement accounts. If a survivor needed to withdraw all of it and paid an illustrative 25% in combined taxes, the usable amount would be $350,000 x 0.75 = $262,500. That figure, not the headline balance, goes into the self-insurance test.

Verdict. Partly true as a last resort, but these assets carry taxes, penalties and delays that a death benefit does not.

Claim 5: "Once I'm wealthy enough, I'll never need life insurance"

The claim. Insurance is for people with little savings. Once you cross a threshold, you can drop it.

The test. This is the strongest version of the claim, and it is largely correct for the core purpose of term insurance, which is replacing income for dependents. As net worth rises, the need falls. A household with a very large portfolio, no debts and no one dependent on future earnings may have no reason for a term policy at all.

What a large portfolio does not necessarily remove:

• Illiquid wealth. If most of the value is in a business, real estate or other assets that are hard to sell quickly, there may be little cash available at the moment it is needed. Insurance can supply liquidity.
• Estate taxes. The federal estate and gift tax basic exclusion is $15,000,000 per person in 2026, according to the IRS. Most families are far below that. Some states have their own estate or inheritance taxes at lower thresholds, which an estate attorney can explain. Where taxes could force a sale of assets, a policy owned in the right way can pay them. This is a different purpose from the income replacement that term insurance usually serves, and it is often handled with permanent coverage.
• Lifelong dependents. A child or relative who will need support for life, and for whom no amount of savings feels safe, changes the calculation.
• Equalizing an inheritance. If one child will inherit a business and the others should receive something comparable, insurance can supply the equal share.

The nuance. These are specific, identifiable needs. If none of them applies, self-insurance is reasonable. If one does, the savings are being asked to do a job they are not shaped for. The guide on laddering term life policies to match your needs shows how a household can step coverage down as its assets grow, rather than all at once.

Verdict. Largely true for income replacement; incomplete when liquidity, taxes or lifelong needs are involved.

Claim 6: "My spouse earns enough, so we don't need it"

The claim. With two incomes, one can cover the household.

The test. This depends on how the two incomes are used. Many two-income households have set their spending and their housing to match both paychecks. The question is whether the survivor could maintain the household on one.

A worked example. Say spouse A earns $70,000 and spouse B earns $50,000, with household spending of $95,000 a year. If A dies, B's $50,000 covers $50,000 of the $95,000, a shortfall of $45,000 a year. Over 15 years that is $675,000 ($45,000 x 15) before growth, inflation and any change in spending.

Now flip the case. If B dies, A's $70,000 covers $70,000 of the $95,000, a shortfall of $25,000 a year, or $375,000 over 15 years. The two spouses do not carry equal risk, and neither is zero. A partner who works part time or stays home with young children also matters: the cost of replacing their unpaid work (child care, household management) is real money that a survivor would have to pay. The How much life insurance do I need? runs this for each spouse separately.

Verdict. False for most two-income households, whose spending depends on both incomes.

A self-insurance test you can run

If you think you may be able to skip a policy, here is a way to check, with a worked example.

1. Estimate the survivors' annual shortfall. Annual spending the survivors would need, minus their reliable income (earnings, Social Security survivor benefits where eligible, pensions). Ask the Social Security Administration for current survivor amounts.
2. Multiply by the years of need. Until the youngest child is independent, and for a surviving spouse, until their own retirement income begins.
3. Add one-time costs. Debts you want paid, final expenses, education.
4. Count only usable assets. Savings, taxable investments and after-tax value of retirement accounts. Leave out the home you plan to keep and any asset you could not sell within months.
5. Compare, and add a margin. If usable assets exceed the need by a comfortable margin, self-insurance is credible. If they fall short, the shortfall is the amount of coverage to consider.

Household S. Shortfall $30,000 a year for 12 years = $360,000, plus $40,000 for one-time costs: need $400,000. Usable assets: $520,000 in savings and investments. Passes with a margin of $120,000. Reasonable to skip a policy, with a recheck each year.

Household T. Shortfall $55,000 a year for 18 years = $990,000, plus $30,000 one-time: need $1,020,000. Usable assets: $150,000 in savings plus $262,500 after-tax from retirement accounts = $412,500. Shortfall: $1,020,000 - $412,500 = $607,500. A 20-year term policy of around $600,000 would fill the gap.

The difference between S and T is not wealth in general. It is whether the wealth is usable and whether it is large relative to the years of need.

Middle paths

You do not have to choose between a full policy and none.

• Buy less. A smaller policy that covers the gap in the test above, not the whole need.
• Buy for the years you cannot self-insure. If your assets are growing, a 10- or 15-year term covers the window until you pass the test. See laddering term life policies to match your needs.
• Step down over time. Layer shorter policies so that the total coverage shrinks as savings grow.

A fee-only financial planner can run a fuller version of this analysis, including taxes and market risk.

Key takeaways

• Self-insurance is credible for households whose usable assets would support the survivors for as long as they need support, and it is not credible when the savings are still small.
• Term insurance exists for the early-death case, when savings have not had time to grow, so investing the premium does not replace it in that case.
• Compare your savings with the whole need, including lost income, not just your debts, and count retirement accounts after taxes.
• A large portfolio removes the income-replacement need but may leave liquidity, estate tax, lifelong dependent or inheritance needs.
• Run the five-step test, and if there is a shortfall, buy coverage for the shortfall or for the years until your assets catch up.