March 27, 2010

Lease or Buy? How Life Insurance Compares With Getting A Car

If you routinely lease your car, you get access to new features such as better fuel economy, integrated Bluetooth, integrated GPS navigation, better headlights, more airbags, all wheel drive and run-flat tires. You can change from sporty to family-friendly to stately, depending on your age and needs.

Car prices may not even increase to keep pace with inflation. This year, Mercedes Canada dropped the price of the E350 to the level of the now-discontinued E300. So you actually get more for your money. That's the power of competition.

Leasing Insurance
You can also lease your insurance. Unlike cars, insurance products change little. As people live longer, the mortality component of the insurance premium decreases. However, lower investment returns and higher expenses boost the costs. Let's assume that the overall premium does decrease. You won't see the savings.

Say you got coverage three years ago at age 40. For new coverage, you'd pay the higher prices for a 43 year old. If your health deteriorated, the price could be much more. You might get denied coverage. Since companies pursue ever-cheaper ingredients, new insurance contracts may subtly weaken guarantees or add new conditions. Instead of sugar, you might get corn syrup. Would you or your advisor notice? With a new contract, conditions start anew. For example, death benefits are generally not paid for suicide during the first two policy years.

Before dumping your current life insurance for a shiny new contract, take a careful look at the consequences --- especially if a different advisor is encouraging you to switch.

Residual Value
Leasing a car leaves you with a residual value and an option to buy.

Leasing life insurance leaves you nothing at the end of the term, generally 10 years.  You usually have an option to convert to permanent coverage at your now-higher attained age. This is especially valuable if you now need insurance for life and your health has deteriorated: you pay normal prices without new underwriting.

When leasing, you can experiment with cars you wouldn't like to own for long. You can pick an unusual colour like bronze/orange or an unusual shape such as the BMW X6 SUV/hatchback. If you're flexible, you can save money by getting a less popular vehicle or a demonstrator.

With insurance, you get fixed prices. That puts the onus on the insurer to be competitive rather than on you and your negotiation skills. That's great for those of us who hate that aspect of getting a car. You also see extra cost gimmicks like the accidental death benefit, which lets you gamble on the cause of death. With cars, you're offered stain protection

If you've decided to get a car, there are arguments for buying new, leasing new or buying old. If you've decided to get life insurance, your choices are simpler. You can't buy old. That leaves buying permanent coverage or leasing temporary coverage.

Podcast 60 (4:12)

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PS You need insurance on your car but you don't need insurance on your insurance

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