Why Owning May Not Be Better Than Renting

When it comes to financial planning, one of the most important decisions you'll face is how to protect your family with life insurance. But as with any financial decision, understanding the difference between what you need and what you want can make all the difference in ensuring that your loved ones are financially secure. Let's break down the essentials of needs versus wants in the context of life insurance.

Defining Needs vs. Wants

Before diving into life insurance specifics, it’s essential to define what we mean by "needs" and "wants." According to Merriam-Webster, a "need" is something necessary, something that is essential to your survival or well-being. In contrast, a "want" is something that you desire but is not essential—something that can improve your life but isn’t required for your basic functioning.

In financial planning, these definitions are crucial. Understanding what constitutes a need versus a want can help you make decisions that prioritise long-term security over short-term satisfaction.

Life Insurance: Addressing the Needs First

Over the past few years, I've encountered several prospects requesting life insurance quotes. After conducting a thorough financial assessment, I typically recommend a life insurance policy based on their needs. For most individuals, this means having coverage that is 20 times their annual income. 

Why 20 times? The idea is simple: with a 5% rate of return on the death benefit, the interest earned can effectively replace your income. This approach ensures that your family has the financial resources to maintain their standard of living indefinitely. The principal remains untouched, while the interest generated can be used year after year, essentially replacing your income forever. 

This amount of coverage is often quite affordable if you choose a term life insurance policy. However, it becomes more costly if you opt for a permanent life insurance policy. A hybrid solution, combining both term and permanent policies, can strike a balance between affordability and long-term security.

The Wants: When Preferences Overshadow Needs 

After explaining the necessity of sufficient coverage, some prospects express a preference for permanent insurance only, even if it means reducing the coverage amount. This decision is often driven by the desire to own something tangible, something that feels more permanent and offers a return on investment, rather than a policy that may expire after a certain period.

Here’s the truth: none of us know when our last day will be. If we did, life insurance would be a much simpler decision—just buy a policy one month before. But life doesn’t work that way. While it’s important to fulfil your desires and wants, such as owning a permanent policy, these should not come at the expense of meeting your basic needs.

Most people shy away from term life insurance because they feel like they're "wasting money" if the policy expires without a payout. They prefer permanent life insurance because it provides something tangible and it’s something they are guaranteed to use while they are living or deceased. With benefits such as an investment component, cash values, and simply the peace of mind that they will always have coverage. 

Rent vs. Own: A Common Analogy

 When discussing life insurance, a helpful analogy is comparing it to renting versus owning a home. Term insurance can be likened to renting your policy—you have the protection you need, but there's no equity built up. Permanent insurance, on the other hand, is akin to owning your policy—there’s a long-term value that can potentially appreciate over time.

Which is better, renting or owning? Both options serve their purpose. Having a roof over your head is a fundamental need, whether you're renting or owning. Most people rent until they have the capital and cash flow to purchase a property. The same principle applies to life insurance. Ideally, you want to own your policy, but in the interim, renting (or purchasing term insurance) is an effective way to ensure you have the necessary coverage.

Start Where You Are and Grow 

Financial planning is not static; it evolves as your circumstances change. It’s important to start with what you can afford and adjust your life insurance as your financial situation improves. This might mean beginning with a term policy to cover your immediate needs while you build your wealth, eventually transitioning to a permanent policy as your financial situation stabilises.

Term insurance, in my opinion, is the best way to create financial peace of mind while you’re in the process of building wealth for your family. Especially when coupled with features like renewability and convertibility. Term insurance offers flexibility and protection without straining your budget. 

Renewable term insurance allows you to extend your coverage at the end of the term without undergoing another medical examination, even if your health has deteriorated. Convertible term insurance gives you the option to convert your term policy into a permanent one, usually without needing a medical exam, providing a pathway to long-term coverage as your financial circumstances improve.

Conclusion: Balancing Needs and Wants for Financial Security

The key message here is the importance of balancing your financial needs with your wants. While it’s natural to desire the security and perceived permanence of a permanent life insurance policy, it’s more important to ensure that your family’s basic needs are met first. This means having adequate coverage to replace your income and support your loved ones in the event of your untimely death.  

Life insurance is not just about fulfilling a desire to leave a legacy; it’s about protecting the ones you care about the most. Starting with a term policy allows you to meet your immediate needs, ensuring that your family is protected, while leaving room to grow into a permanent policy as your financial situation improves. 

So, when faced with the choice between a need and a want in your life insurance decision, prioritise your needs. Secure your family’s future first, and then work towards achieving your desires. This approach will provide both peace of mind and a solid foundation for your family's financial security.

Are you ready to review your insurance needs to ensure you’re adequately protected? Let’s get started. Book your call here.