Do You Still Need Life Insurance If You’re Rich (Self-Insured)?


Is it possible to be so well off that you are virtually self-insured when it comes to life insurance? It probably is, if you’re worth several million dollars or more. There are a lot more people who are worth somewhere between $250,000 and $1 million – which is rich by the objective standards – but still doesn’t rise to the level of making you self-insured.

The basic idea behind being self-insured is that you have so much money that your loved ones will be covered out of your financial assets, eliminating the need to maintain life insurance at all. But if your family will need all of your financial assets in the event of your death, life insurance can fill in some unexpected gaps that will be opened up as a result of your death.

In such a situation, you’ll want to maintain life insurance primarily for the purpose of preserving the actual value of your financial assets by preventing them from being reduced by expenses that will arise in the event of your death.

Here are some examples:

To Cover Final Expenses

Depending on the standards of your cultural and social circles, a funeral can cost anywhere from a few thousand dollars to tens of thousands dollars. Among the wealthy, it can even run into several hundred thousand dollars – the cost of just about everything is higher the wealthier that you are.

But let’s say for example that you have $1 million in financial assets, and that you reasonably expect that your final arrangements will be something on the order of $50,000. That will represent 5% of your total financial worth, and that may be something you want have life insurance to cover.

Even if you think of yourself as being self-insured due to the strength of your financial position, having life insurance is mostly about guarding that financial position in full for your loved ones in the event of your death.

There are other examples however.

To Settle Lingering Medical Debt

Even if you have the best health insurance money can buy, there may still be lingering medical debts after your death. In fact, the likelihood of uncovered medical expenses is usually much higher when a patient has a terminal illness or condition. This is because there is a greater likelihood than experimental procedures will be attempted, even though they are not covered by insurance.

This can result in significant out-of-pocket expenses – often involving hundreds of thousands of dollars – that will represent a substantial drain of the assets of your estate. By having a life insurance policy large enough to cover such expenses – or at least an allowance for what you believe they may be – you will protect the full value of your financial assets for your loved ones.

To Payoff Other Debts

Today, even people who have substantial financial assets often carry significant debt. The best example is a home mortgage, but there can also be business debts and other personal debts. After your death, it’s unlikely that your family will be able to cover the debt service on those obligations. Having a sufficient amount of life insurance to pay them off completely will improve your family’s cash flow situation, and make them less likely to drain down the estate assets for everyday living expenses.

Your debt levels may actually be an excellent starting point for determining how much life insurance that you need to have. For example, you can combine the mortgage on your home with any other debts that you have, and add in an allowance for final expenses, and also for anticipated uncovered medical expenses.

To Pay Estate Taxes

We’ve covered the topic of estate taxes elsewhere on this site but it raises a discussion here as well. Despite the fact that most estates will not be subject to the federal estate tax (the threshold for 2014 is a gross estate of $5,340,000), it is still entirely possible that estate taxes will be due at the state level.

You will certainly want to have life insurance to cover federal estate taxes if your estate will be worth well above $5 million. But you should also be aware that different thresholds may apply depending upon the state where you live. For example, the estate tax threshold in New Jersey is $1 million. If you live in such a state where the threshold is lower than the federal level, you’ll want to have an amount of life insurance to cover whatever the tax burden might be.

Even if you think of yourself as being self-insured, due to a higher level of financial net worth, you should still want to have a sufficient amount of life insurance to make sure that all that is currently in your estate will in fact pass to your heirs. Having no insurance at all will mean that they will receive only a reduced amount of your financial assets at the time of your death.

Life insurance is the best way to fix that problem.