Why the mind struggles with life insurance

Most of us are inclined to believe because bad things don’t happen very often, they’ll probably happen to someone else. But the events covered in life policies do not discriminate. All claimants would tell you the same thing: lives are snatched away at random.

Dependent families of the uninsured can be left in a terrible position.

So, what is it that holds us back from taking out life insurance? It’s not easy to say, but behavioural biases may have something to do with it.

Here are some examples:

An intangible alternative

It’s hard to imagine the effect of a death on dependents unless you’ve seen it for yourself. The grinding reality for families affected this way is kept behind closed doors. It’s unlikely they’ll feel inclined to make a show of it. This lack of evidence of a negative outcome makes it hard to consider the benefits of risk cover. Unless you’ve been through it yourself, how can it be tangible? The alternative of annual insurance premiums will be far more measurable.

Cost and benefit imbalance

The value of premiums paid in the here and now is known absolutely, but amounts received in the future are deemed to be of less and less value the longer the time until they will be received. The phenomenon of 'hyperbolic discounting' means that even a small delay in receiving a reward will see it lose disproportionate value in the mind of the receiver.

Losses more painful than joy of gains

Financial loss is experienced more keenly than the lift in spirits which accompanies gains. Also, multiple small gains or losses affect emotions more than an equivalent single large gain or loss. Regular insurance premiums will be seen as more of a drag to the spirit than the chance of a single gain at some point in the future. And remember: the receiver will apply a heavy discount to any future reward.

Understand you are biased

Trustees of DIY funds have to at least consider risk insurance, but they will also need to understand more about the inbuilt biases which direct them. A reminder of the behavioural distortions common to all human decision-making may be enough to steer funds to solutions that cost them today and save them tomorrow.

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