I have decided that people don’t make rational decisions. (I suppose this might be one so be careful) They make emotional decisions and then use logic for support after the fact. People who try to use rational thought to persuade them must inevitably lose out. It does not work.
How many people do not have disability insurance? Or life insurance for an appropriate amount? Quite a few. Well over half the population. It is not rational. For most people, their career is their most valuable asset. For young people, their only valuable asset.
It can’t be the idea of insurance. They willingly insure their apartment contents and their car. They want to be covered for unlikely losses.
It cannot be the calculation of probabilities. A home being destroyed by fire is a once in 250 years sort of thing. I have owned cars for a long time and I would need to write off a luxury car to come close to getting my premiums back. Even without interest.
It must be something else.
I submit that disability and death are negative ideas and no one likes to deal with those. So they don’t. Doing nothing has no cost right? It is like a baby who thinks you can’t see them if they close their eyes. Emotion rules action.
The probability of collecting on a disability insurance policy or a life insurance policy during you working life is not big. Probably no more than one in forty or so. Still much more likely than an insured house burning down. Low probability is good. If the odds of collecting were very high, no one could afford the premium.
I had a client in 1980 who wanted to ship cargo to Dubai on the Persian gulf. There were hostilities in the area at the time. Something about an embassy. The premium was 20% of the value of the ship and its cargo for five days of coverage. The size of the loss and probability both affect premium. Cargo went overland from Cairo instead.
Despite the favourable price of life and disability insurance, people make do with too little.
Probabilities are numbers. They describe large groups of people. They don’t describe individual reality very well. If the odds of you dying in the next 40 years are 2%, you must notice that you cannot be 98% alive at the end. You will be 100% alive or 0% alive. It is a binary decision and you are insuring the choice of which. Low probabilities tend to become excuses in this context. For the ones who did not make it, insurance would have been the difference for those who remain.
When the outcome considered is a good one, albeit with low probabilities, people are more likely to pay the premium. Like the price of a lottery ticket. In Canada, there is a national lottery where the odds of winning are about 1 in 20,000,000. Less if you factor in that you might not be the only one to win. People buy these. Why? Because someone must win and it could be me.
I don’t know exactly the comparison, but I would guess that one in 20 million is about the odds of a twenty-five year old, insurable female non-smoker dying in the next 15 minutes.
I would bet most of them would do so with inadequate insurance. Who wants to bet against me?
And you think people are rational?
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772