Should I rent or buy a car?
Compare getting term life insurance to renting a car. When you lease a car, you get to use it, but when you stop making payments, you no longer have a car. As with term insurance, you get the benefits of a term life insurance policy as long as you pay your premiums. Once you stop paying, you no longer have any coverage.
Whole life policies, which are also called "permanent policies," are made to build up cash value. So, just like when you buy a car, you have something you can keep. Unlike a car, this asset should go up in value, unlike a car. Permanent insurance comes in different forms, such as Whole life, Universal life, and Variable Universal life. Most of the time, permanent insurance is meant to last until you die or to help you save money.
Different types of insurance are called things like Whole Life, Universal Life, and Variable Universal Life based on how the policy's value grows. This helps you learn about the different kinds of permanent policies.
"Whole life" is a type of insurance policy where the premiums and death benefit stay the same over the life of the policy. Most of the time, you have to keep paying the premiums for as long as the policy is in effect.
"Universal life" is an insurance policy where the owner can change both the premium payments and the death benefit. Most of the time, if you want to increase the death benefit, you will have to show proof that you are still able to get insurance. This could be medical information or other requested information. Your policy grows at a rate of interest that you know about and that changes from time to time.
"Variable universal life is an insurance policy where the owner can change both the premium payments and the death benefit. Most of the time, if you want to increase the death benefit, you will have to show proof that you are still able to get insurance. This could be medical information or other requested information. Your policy grows at the rate you choose for your investments. Since you can buy market instruments that are like mutual funds but not exactly the same, you can invest. Your policy can lose value, which could mean you have to pay more than expected in premiums.
If you step back and think about it from the insurance company's point of view, it's easier to see the difference. Part of the "cost of insurance" will be paid for by the cash value that builds up in the insurance contract.
Whole life: Most of the risk is taken on by the insurance company. No matter what happens to the cash value in the account, they will pay you a death benefit. The insurance company has to pay your death benefit as long as you pay your premiums. This could be the most costly.
Universal life: The insurance company is taking a risk. With the interest rate it pays now, the policy is getting bigger. There are times when you can only get low interest rates. To keep your policy, you may need to pay more money.
Variable The insurance company has taken the least amount of risk with universal life. In a variable policy, the rate of return changes, so you don't know how quickly your policy will grow or shrink. This kind of policy is most likely for younger people who can handle the ups and downs of their portfolio. This type of policy usually has the cheapest premiums because you take on the most risk.
