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

Conclusion
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.

Links

• Buying versus leasing versus buying a used car (Edmunds.com)
• Small cars: is 'safer than ever' safe enough for you? (includes crash test videos)
• Oblivion: what happens if my insurer crashes and dies?
• Do you pay your car mechanic for effort or results?
• Irrational behaviour: is a BMW twice as good as a Hyundai? 
• image courtesy of R John Schuler (Germany)

Podcast 60 (4:12)

direct download | Internet Archive page

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

How Advisors Really Prepare Term Life Insurance Proposals

If you have a short-term need, term life insurance provides the most protection for the fewest dollars. You may think you can buy on price. That's generally true. Advisors say they'll survey the market to pick the right proposal for you. Some do and some don't. Here's what really happens.

Run Computer Illustrations
At The Sony Store, you can't buy Samsung, Panasonic or Nakamichi. Some advisors only sell products from one company. They give you get no choice. You rarely get the lowest price either. Since the advisors are captive and need commissions, the insurer gets sales without being especially competitive.

Independent advisors often conduct market surveys using comparison tools. You can do this online yourself. Beware of biases. Comparisons may not consider all products available since an advisor is only contracted with selected companies. Do you think they'll show products they don't sell?

Some advisors do show all products and then explain their recommendations. This prevents another advisor from showing you a cheaper option.

Coke or Pepsi? Like most of us, advisors have personal biases. Some insurers provide better support. Some pay more compensation. Some give better ongoing service. Some are better at paying claims. Some are better-known (e.g. more like GM than Subaru). Some are more financially stable. Some host better conventions.

Since there are so many insurance companies, it isn't practical for your advisor to deal with all of them. It's not advisable either. Because forms and procedures differ among companies, mistakes can easily be made. Companies also disappear, but you're protected against that.

Risk Classes

Insurers generally charge different rates based in expected claims

• males pay more than females
• smokers pay more than nonsmokers

Now there are further distinctions by health: regular (higher), preferred (lower) and elite (lowest). Since your advisor can't which class you'll be in, you'll probably see comparisons for the regular class. If you're found to be healthier, you'll get the pleasant surprise of a lower price. That's better than thinking you'll qualify for elite and having to pay more. 

If your health is even worse than regular or if you take part in dangerous activities like race car driving, you'll face a temporary or permanent surcharge for that extra risk.

Since companies assess risks differently, your advisor might ask you to apply to several insurers. 

After The Term
Circumstances change. You may find you that you need permanent insurance. Most insurers anticipate this and let you convert your temporary protection to pricier permanent coverage up to a maximum age (say 65). You don't even require proof of good health. You simply pay the higher premiums for the new plan based on your current age.

Your advisor may anticipate your changing needs and select a term plan from a company with good permanent plans. Your term coverage may cost a bit more in exchange for these valuable options.

The Proposal
Your advisor may take the time to prepare a simple easy-to-follow summary of the different products. Others skip that step and show you computer-produced illustrations for selected companies and let you pick. Others select a company for you and only prepare proposals for that one. These advisors may bring printouts for different coverage amounts to help with your budgeting.

Despite the simplicity of term life insurance, you'll see differences in the advisor approaches. Since products and prices are similar, you'll generally get a reasonable solution. The deviations hurt most with a complex product like universal life.

Links

• Oblivion: what happens if my life insurance company dies?
• Why you can't and don't buy on price
• Does Warren Buffett "buy term and invest the difference"?
• Why insurers won't insure you
• Secret 7: The best tax sheltering in Canada
• The power of redundancy
• image courtesy of clix (Brazil)

Podcast 59 (4:33)

direct download | Internet Archive page

PS Paying premiums monthly is great for budgeting but usually costs more than paying annually.