Make the case for whole life vs. term insurance

Prospects often think buying term insurance is sufficient. Why would they pay more to get the same coverage? Here’s an analogy that helps make the point.

Rent-to-own is a concept within the real estate industry. It’s complicated, but here are the basics:

  • The seller sets a price for the house. (It could be higher than market value.)
  • The buyer pays a portion upfront, maybe 5%. This goes toward their principal.
  • The rent the buyer pays includes both the conventional rent, plus an extra amount that counts as a principal payment toward the eventual purchase of the home.
  • There’s a contract period involved.
  • At the end of the period, the renter can finish buying the property by paying the difference between the principal they’ve already paid and the agreed-upon price.
  • If the renter chooses not to buy, the seller is entitled to keep the principal paid.

It’s a much more complicated process usually involving lawyers, but you can see how the analogy applies to term and whole life insurance.

What are those analogies?

Here are the points for explaining the concept

1. “Rent is giving money away.” If you rent for years, you don’t end up owning anything. If you buy a property and pay a mortgage, eventually you own the property.

Term insurance: It’s like rent. You get coverage but don’t build up cash value.

Whole life insurance: In addition to getting coverage, you are also putting some money away. The cash value should eventually grow to the coverage amount.

2. You are saving while you are paying. In the rent-to-own example, a portion of your rent payment is applied toward the eventual purchase price of the property.

Term insurance: Like rent, it’s all paying and no saving.

Whole life insurance: A portion of your premium payments goes toward paying for coverage, another piece goes toward building cash value.

3. You know the end amount. Life insurance is all about protection against uncertainty. In the rent-to-own analogy, you know what the purchase price of the home would be, even if that time is many years in the future.

Term insurance: You know the coverage amount, but you need to keep renewing. You don’t know what renewal costs will be in the future.

Whole life insurance. With rent-to-own, you know the agreed purchase price. With whole life insurance, you know the coverage amount if you die early and the expected future cash value if you continue making payments.

Why is whole life insurance even better?

The rent-to-own example might sound pretty cool. Why doesn’t everyone do it? There are risks.

1. Risk of loss. If renters choose not to buy at the end of the period, they’ve lost the principal they paid upfront along with the extra principal applied along the way.

Whole life insurance: If you cancel the policy, you still own the cash value, although some fees might apply.

2. Declining property values. It might happen. The rent-to-own agreement establishes the eventual purchase price upfront. If property prices decline, you don’t get a lower purchase price.

Whole life insurance: Your cash value continues to grow. It likely has an established internal rate of return. Interest rates might go up and down, but you know what you will ultimately receive when the cash value rises to the face amount of the policy.

3. Credit rating isn’t an issue. Rent-to-own makes sense if your credit rating isn’t good now, but you expect to repair it over several years. If you don’t, the banks probably won’t lend you the money you need for the difference between the principal you saved and the agreed purchase price of the property.

Whole life insurance: It’s about gaining protection and earning money. Your credit history shouldn’t play a part. The insurance company isn’t lending you money.

Why this is a good analogy

You might think getting a mortgage tells the same story. Why not use that analogy? When you get a home mortgage, you also need to pay property taxes and various monthly costs. When you pay rent, you usually write one check. The landlord does the rest, except for gas, electricity and other charges.

Having a portion of your rent payment applied toward the eventual purchase price sounds like a great idea. Wouldn’t everyone want a deal like that, instead of “throwing money away” on rent?

You just made the argument for whole life vs. term insurance.

Bryce Sanders is president of Perceptive Business Solutions Inc. His book, Captivating the Wealthy Investor, can be found on Amazon.

For more ways to talk to clients about life insurance

  • Thanks Bryce.. That’s a nice analogy to explain to young investors who feel Term plan is better .. I have explained the same concept to my clients interested in Real Estate and got favourable response for Whole Life Plans with cash value.
    You have given a good idea for Term plan seekers..

  • bryce m sanders says:

    Good point, Erina. I though so too. Thanks for commenting.

  • bryce m sanders says:

    Kalvin, you bring up a good point. Whole life costs more than term insurance, especially in younger years. However, “term” insurance is aptly named because it runs for a fixed period. When that period is over, the cost to renew the same coverage is higher, because everyone has gotten older. The whole life premium has stayed level. Also, if you spend a lifetime making term insurance premiums, what do you have to show for it besides the eventual death benefit? Whole life has built up cash value. You are correct, like owning vs. renting, there are times when renting might be the better solution. Thanks for taking time to comment on my article.

  • bryce m sanders says:

    Greg, that’s a great point. Thanks for commenting.

  • Greg Fruetel says:

    Term life is needed but only helps in untimely death. Whole life can cover that and then can also be used to guard against out living your income.

  • Kalvin Sid says:

    The problem with this article is that it doesn’t show the difference in premiums between whole life and term. If the premiums were exactly the same then whole life is definitely better. Unfortunately the difference in premiums is often more than what goes into the cash value of the WL policy. It’s the same with renting vs. owning. If you rent an apartment that costs $1000 per month or rent to own it costs $3000 per month, does that entire $2000 difference go towards equity? If not then maybe renting is better and investing the difference?

  • Term v/s whole life insurance well explained in the form of rented house

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