Term Insurance vs. Whole life or Permanent Insurance - A Car Analogy

Summary: Comparing Term Life Insurance to Permanent Life Insurance Policies. Gives an example to help understand the different types of insurance.

Should I lease a car or buy it? Think of a term life insurance policy as leasing a car. When you lease a car you get the benefits of using the car, but when you stop paying you don't have a car anymore. As with term insurance as long as you pay your premiums you get the benefit of the term life insurance policy, but when you stop paying, you no longer have any coverage. Whole life or "permanent policies" are designed to build up a cash value. So similar to buying a car you have an asset that you can keep. Unlike a car, hopefully this asset will grow in value. Whole life, Universal life and Variable Universal life are all different types of permanent insurance. Permanent insurance, most of the time, is meant to keep until you die or as a saving vehicle. The way the policy grows in value gives you the different names of insurance such as, Whole Life, Universal Life, and Variable Universal Life. That leads to the understanding of the different types of permanent policies. " Whole Life- Is an insurance policy where premium payments are usually the same throughout the life of the policy, as is the death benefit. You usually need to pay the premiums as long as the policy is in force. " Universal Life - Is an insurance policy where premium payments may be changed and the death benefit can also be changed by the owner. Usually if the death benefit is being raised you will have to show some evidence of insurability (medical information) or other information requested. Your policy grows at a stated interest rate which changes every so often. " Variable Universal Life - Is an insurance policy where premium payments may be changed and the death benefit can also be changed by the owner. Usually if the death benefit is being raised you will have to show some evidence of insurability (medical information) or other information requested. Your policy grows at the rate of your investment choice you choose. Since you may invest in market instruments similar but not exactly like mutual funds. Your policy can lose value causing larger premium payments than expected. Take a step back and think about it from the insurance company's point of view, its easier to understand the difference. A portion of the cash value that builds in the insurance contract will pay for the "cost of insurance". Whole life- The insurance company is taking most of the risk. They are paying a death benefit to you no matter what happens to the cash value in the account. As long as you make your payments the insurance company has to pay your death benefit. This may be the most expensive. Universal life - The insurance company is taking some risk. The policy grows give the current interest rate it pays. At times you are only able to earn low interest rates. You may need to make up more payments to keep your policy. Variable Universal life - The insurance company has taken the least amount of risk. In the Variable policy the rate of return is variable, meaning you don't know how fast your policy will grow or shrink. This type of policy is most likely used for someone who is younger and can ride out the volatility of their portfolio. Since you take on the most risk in this type of policy it usually has the smallest premiums.