Renting vs Buying: An insurance explanation

After a recent post one of my friends inquired about the differences between Whole-Life and Term Insurance, so I decided to inform the masses.

Think of term insurance as if you are renting an apartment for 10, 20, 80 years.  The premium that you pay every year is cheaper then whole-life, but you must remember that you are only purchasing a death benefit (money is delivered to your beneficiaries after you die).  Term policies expire after a certain time period and so you must renew the policy or purchase a different one just like the lease being up on an apartment.  *note that you can convert most term policies to whole-life (permanent) insurance after 1 year of having the policy.

Whole-life insurance is like purchasing a house.  You would pay more for your insurance, but you own it forever until the day that you die.  After the first 10-15 years of having your policy your insurance costs should be paid off by your premiums and after that your money will be growing exponentially, just like having equity in a house.  The money that is within your policy is known as cash-value and can be borrowed against as if you were taking a loan out against yourself.  You not only have a death benefit, just in case something were to happen to you, but you also have access to money while you are alive as well.  The beautiful thing is that if the loan against your cash-value isn't paid back (which most of the time it isn't) the balance of your loan will be subtracted off your death benefit and the remainder is till delivered to your beneficiaries.  Example: Say you are 50 years old and you decide to go through a mid-life crisis and purchase a Corvette and borrow $50,000 against your cash-value (and have the funds to do so) of your $500,000.  The money, plus whatever the company's interest is (we'll say 8%),  we'll be subtracted from the death benefit.  So, if heaven forbid, you were to pass next year your family would be looking at getting roughly $446,000.  Not too bad right?

Hopefully this sheds some light on the topic and if you have any specific questions feel free to comment or shoot me an email.

later days.