Can You Self Insure? – Episode 139

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome back to the Prosperity Podcast. Once again, we have the president of Partners for Prosperity, Kim Butler, with us today. This is the No BS Money Guy, Todd Strobel. And today we’re going to be working through some more money myths. And we’re going to be asking two questions. One is, can you self-insure? And two, should you self-insure? And I think before we get started, Kim, maybe you could just define what we’re talking about when we say this term self-insure or self-insurance.

[00:54] Absolutely. So this is typically talked about in the area of life insurance, because obviously to drive a car, you have to have car insurance if you want to be legal. Most people have mortgages on their homes, so we have to have mortgage insurance because the bank or homeowners insurance really is what I’m talking about. The banks require that as part and parcel to the loan. But this idea of self-insurance comes up occasionally. If somebody has a paid off home and maybe they don’t want to have insurance anymore, then it comes up quite often in the area of life insurance. And I have a very visual image in my head of a joke that I heard one time about a guy sits down when he’s 65 years old and his term insurance is ready to drop

[01:45] off. In other words, maybe he had 30 year term insurance, now it’s at the end of the 30 years. And he has dinner with his wife and he says, well, tomorrow if I die, I’m worth a million dollars less than if I die today. And the question at the end is like, what do you think she’s going to feed him for dinner? And so this brings about this concept that so many people promote and they may not use this terminology, but it’s this idea of self-insurance. And it’s that you can build up enough assets in order to, quote, not need life insurance. And truly, I don’t know where this idea originated because the very concept of self-insuring is I think an incorrect statement in itself. In other words, to combine the word self with the word insure.

[02:50] The word insure implies that you are shifting risk from your own self or your own family to an insurance company that is an expert at handling that risk. In other words, we wouldn’t ever buy car insurance from a life insurance company. Now, there are some companies that do offer both, but on the same hand, we wouldn’t buy life insurance from the same company that we insure our boat with. And we wouldn’t insure we wouldn’t buy car insurance from our boat company. This is a specialized area. In fact, it goes so far as since a lot of our listeners know that we have alpacas, there’s actually insurance that you can buy on alpacas. It’s very similar to the type of insurance you would buy like on a race

[03:44] horse or some other exotic animal that was worth money that if that animal died, you would want to be have you would want to be replaced. There’s indemnified. That’s the word I’m looking for. You would want to be indemnified. And that means that you got the entire value back from the insurance company who is a specialist at dealing with this risk. So here we have the myth of, well, you can build up enough assets to where you should not shift off the risk to an expert. And I think right there that should bring us up short. Like, what do you mean? I I’m no longer going to have this expert at my disposal. That’s essentially what self-insurance is doing. Well, and I think so many people when they reach that point in their life and

[04:42] they’ve done a good job saving and I’ve got to compliment a lot of our listeners out there have substantial six and seven figures set aside for their retirement accounts as they’re even in their 50s and moving forward. And they’ve done a fantastic job at doing that. And maybe at some point in their lives, they were sold this idea of self-insurance. And now think about this. If you have that insurance policy in place, you can take that money and know that if you had an emergency, you could use that asset because that’s what it was really set aside for. You could give that asset to a charity and watch it do some good. You could share that asset with your family members while you’re still alive

[05:30] and know that that asset will be replaced by using the concept of insurance. The creation of additional wealth, in my mind, at least, creates a requirement for additional insurance, not the lack of it. That is very well said. And it’s amazing when you look at the human life value numbers that are defined by the insurance company as the amount, the maximum amount of money that they would provide for a family. If you have a family whose gross worth is $5 million, they’ll provide $5 million. If you have a family that’s done an even better job of building wealth and their worth is $10 million, the insurance company will provide $10 million. So why is it that the insurance company will actually provide you more

[06:27] if you have more wealth, but our society somehow thinks that you should have less? Do you know, I mean, when you think about this history that we’ve come upon and your good work and research in the financial world, do you even know where this idea of self-insurance came from? No, because I was just reading about, you know, Warren Buffett and several other billionaires got together and they made a commitment that before they died, they were going to give away 99% of their wealth. Now think about that. Every one of us could have that same commitment and not affect the inheritance to our heirs by replacing that with insurance. Absolutely. And that’s what indemnification does. It replaces the value of something.

[07:19] And I want to address this issue of needs analysis that somehow goes on inside the life insurance arena that does not go on in any other insurance arena. So in other words, when you look at life insurance, many insurance agents want to take you through a needs analysis, which says, if you had died yesterday, do you want to pay off the mortgage? Do you want to educate your children? Do you want to provide money for a business debt? Do you want to provide a certain level of income? And you create this quote, need that takes place and is figured out on a calculator. No other insurance ever does that. You don’t say, well, I’m going to insure my $50,000 car only for what I need. And I really only need a $20,000 car.

[08:07] You know, a $20,000 car would still get me to work and around, etc., etc. You wouldn’t do that if you have a $50,000 car that’s worth $50,000. You’re going to insure it for $50,000. And so this idea of self-insurance, again, has gotten way off track because it somehow thinks that the larger net worth you’re gaining and growing, the less insurance you need when in actuality, the larger net worth you have and the net worth that you’ve gained and the net worth that you’re growing, the more insurance you want to have. Because insurance enables you to use and spend that net worth or gross worth, and I’ve gone back and forth between my words here, more efficiently. And the reason that I’m going back and forth on my words is that gross worth,

[08:59] so let’s say you have $5 million, but you have a million-dollar mortgage. So net worth is obviously $4 million. But your actual value is really the $5 million. Yes, you have debt that shrinks it down from a net standpoint, but you can truly get insurance worth your gross worth. We have a client that only has about a million-dollar net worth because he has massive, massive amounts of real estate. His growth worth is, I think it was $16 million. It doesn’t really matter what the number is. He has about $14 million of life insurance because that’s what his growth’s worth is. So that really proves that. So bringing us back around here, I think you asked two questions at the beginning. I just want to make sure we get them answered.

[09:44] So it’s should you self-insure and can you? And those are two different things. So help me wrap us up so that we make sure we’re really getting those two questions answered properly. I think to summarize the can you self-insure, the answer would be no, because every dollar that you save towards self-insuring makes you have a need for a greater amount of insurance. So there’s no way that it ever catches up. That’s right. And so if your gross worth is going higher and higher and higher, your opportunity to have that money indemnified and those dollars insured is going higher and higher and higher. Perfectly said. Literally, you know, I have seen people who are in usually their 80s or 90s that would pay a million dollars for a million dollars worth of life insurance

[10:42] because they’re higher net worth individuals. And the tax treatment of those insurance benefits, the death benefit is so great that they would be willing to pay full price just to get the benefit. And then our second part was should you self-insure? And I think same thing, we’ve got to go back to the no. Stick with the experts and buy as much as life insurance as you can, one, afford and two, the life insurance company will sell you. And I would like to just point out that, you know, with our lifespans being longer and longer, it’s getting easier and easier for older people to buy insurance, isn’t it? Yes, that’s very true. It’s not uncommon for us to work with 70 and 80 year olds and help them buy insurance on their lives.

[11:34] Yes, we often buy life insurance that the 70 or 80 year old owns and it’s on either their adult children’s lives or it’s on their grandchildren’s lives. But absolutely, if somebody is healthy, they can get insurance out in their 70s and 80s. And when somebody in that stage purchases life insurance, they’re not as focused on the internal rate of return on the cash value. They’re more focused on the internal rate of return on the death benefit. And that’s a very measurable number that with Truth Concept Software, we can pull up and literally provide a year by year analysis of what the death benefit rate of return is. But you brought up an additional important point, and that is the tax free nature, income tax free of that death benefit.

[12:25] And of course, obviously in 100 percent cash. So whereas somebody’s worth may be tied up in businesses or real estate or other investments that are not liquid, life insurance and its death benefit are going to be immediately liquid. Yeah, I was thinking about your person with those 14 properties. I mean, it would probably take a substantial amount of money just to get everything transferred over. That’s right. It’s a lot of work and it’s not always done at an easy time because of the death in the family and by people that know what they’re doing, because this guy runs his real estate and there’s not necessarily a spouse or a family member or even another person in the company that could just step in and pick that job up and run with it.

[13:16] So the cash that is immediately available from the death claim can bring in an expert if needed, could pay the bills for a while if needed. And obviously all those mortgages have to be paid and provide the family some time to work things through. So we don’t talk about death benefit very much here on this show. We’re big fans of cash value life insurance. And of course, we like to talk about all the living benefits. But death benefit plays an important role as well. Absolutely. You know, like I said, in that particular person’s case, you would have to fire sale those properties and maybe get far less than they’re worth. Whereas you could take your time, you know, go through the grieving process, have a family meeting and decide what needs to be done, property by property.

[14:03] And you have the money to keep them. You have the money to sell them. You have the money to fix them if they’re in need of repair. I think we’ve just blown this can you or should you idea of self-insurance out of the water today? I do, too. I give us an A plus. So anyway, we’re here to not so much give you the answers, just to help you ask the questions. And we would love to hear more of your questions. If you have a question, you can reach us at hello at partners. The number four prosperity dot com. And again, this is No BS Winnie Guy Todd Strobel special thanks to our expert, Kim Butler. And we’ll see you all again real soon. Thank you for listening to the Prosperity Podcast to take control of your money and have it work for you.

[14:51] Visit us at partners for prosperity dot com. If you liked this episode, make sure you subscribe and leave a review.