Is life insurance a waste of money?

Question: Is it rue that I will just be wasting my money on life insurance because I know that death is something that I will face only much later in life? Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, Linkedin, Whatsapp, Instagram and Facebook.

Answer: The brain is most afraid of losing. This fear has been characteristic of humans since the time of the cavemen and is an intrinsic part of survival instincts. In fact, behavioral economists say that losses hurt more than gains please. Here is a demonstration.

I often ask participants at personal finance seminars, now webinars, to imagine their reaction if they were to win P20. Hardly anyone will say they will be jumping for joy over their unexpected prize. But when I ask them to imagine that they were to lose P20, what arises is a common sense of uneasiness with the prospect. Some would frown while others will even ask why?

In the simple example, we were talking of either winning P20 or losing the same amount. Yet the intensity of the pain from losing P20 appears much greater than the intensity of the joy, if any, in winning the same amount.

This fear of losing is most evident when people insure against loss or damage to property. But how is it that people, at least in the Philippines, are not so keen on buying life insurance? Is it not true that it is relatively easy to replace property and impossible to replace a life? Does this behavior mean that what we said earlier about losses hurting more than gains please does not apply to life itself? Actually, it does.

In an effort to avoid focusing on the loss of life, the brain attempts to mask mortality by being overconfident, one of the brain’s coping mechanisms. This is evident when people take on the belief that they will live a long and healthy life, making buying life insurance not a necessity. After all, they can use that time to accumulate savings and investments that they can leave to their loved ones when they go. In addition, the brain compounds that belief by using confirmation bias.

Confirmation bias deals with choosing information, events, or anything that the brain can consider selectively, and not objectively in justifying beliefs. Even having lived another year can be used as proof that indeed a person will have long to live. Yet events can quickly change for the worse.

I remember telling myself that if only I had moved one highway lane to the left, I would have avoided that pebble that was kicked up by the tires of a bus in front of me and prevented me from ending up with a broken windshield. Or if I had only left my house a mere five minutes later, I would not have been at a stop in traffic in front of this speeding driver whose foot slipped while applying his brakes, thereby rear ending me. And if someone were to reason out that these are mere accidents, then all we need to think about is how life under COVID-19 could have been different if actions against its spread were taken just a few weeks or even days earlier. But who would have thought…?

Living life without life insurance is like making a big bet that life will be long and healthy. But people can still live life responsibly without making that bet. How? By letting a life insurance company make that bet for them. Life insurance companies actually agree that people will live long. Life insurance companies use that long period together with their deep bench of experts to grow small premiums into large coverages. And should life insurance companies “lose” on that bet, they still stand ready to pay out the “winnings” to beneficiaries. Any personal savings and investments that people get to accumulate will be the proverbial icing on the cake.

Buying life insurance is getting coverage on a sure thing; it is the proper coping mechanism against mortality.

Stay safe and healthy.