Do You Need Life Insurance

Which of the following cartoon characters need life insurance?

• Batman
• Spiderman
• Marge Simpson
• Fred Flintstone

That question was posed in a poll commissioned by Life Happens, a nonprofit organization started by insurance companies, in an effort to better understand how the public perceives the need (or lack thereof) for life insurance.

Most people thought Batman and Spiderman needed life insurance – presumably because of the inherent dangers of battling the Joker or swinging from high buildings on nothing but a strand of a spider's web. Marge Simpson and Fred Flintstone were viewed as less in need of life insurance, presumably because they engaged in relatively lower risk pursuits — living with a oaf like Homer and driving around in a stone-wheeled, human-powered vehicle that traveled at a fraction of the speed of modern cars.

But as any prudent financial planner will tell you, the determining factor when answering the question "Do I need life insurance?" is not the relative danger of one's profession or hobbies but something altogether different: how many people depend on my income? Since both Marge Simpson and Fred Flintstone have spouses and children -- who's going to take care of Pebbles, Lisa, Bart and Maggie? -- would benefit from life insurance, were the unthinkable to occur. Perpetual bachelors like Batman and Spiderman would have much less need for life insurance, no matter how perilous the lifestyle of a superhero might be.

Put it bluntly - "If you're married and you have a spouse that's depending on your income and needs it if you pass away, you need life insurance. If you are married and you've got children, you need life insurance. If you're single and you have dependents, children or some elderly relative who's depending on your income, you need life insurance."

Okay, so say you’re more like Marge or Fred than Batman or Spiderman. So why might you, or people like you, delay getting life insurance, or avoid getting it altogether?

One major reason sticks out: it’s very difficult to think about our own deaths. Making life insurance decisions means confronting the fact that we might die and the fact that we might die much earlier than we would hope.

Biased decision-making
Over and above our aversion to thinking about our own death, there are many other cognitive pitfalls that prevent people from making clear-eyed decisions about situations that involve serious future losses. Researchers point to the following biases that affect these kinds of choices:

• Failure to account for probability of unlikely but devastating losses
• Loss aversion
• Default bias
• Present day bias

Part of our problem comes from the difficulty of assessing the probability of large but unlikely losses. And while we know that some people are likely to die prematurely, it’s very hard for us to comprehend the risk that we might die.

And since we don’t have a firm understanding of the risks, it’s difficult for us to assess what could be a reasonable cost for life insurance. Figuring out the true level of risk we face, and thus the real value of any policy we might want to purchase, becomes an obstacle to purchasing any life insurance at all.

Even if we can adequately assess the risk, there are further considerations that complicate the process, like how big a policy to buy, what kind of policy to buy, and how much can we afford to spend a month.

Loss aversion also affects life insurance decisions. Being loss averse means we feel the pain of a loss more than we feel the benefit of an equal-sized gain. Study after study shows this effect. People are much more willing to expend effort to keep something they own than they would be to gain something of equal value that they don’t yet own.

Even if you give a person something trivial like a coffee mug, for instance, they often will require a much higher price to sell it than they would have paid to buy it.

When it comes to life insurance, we feel the direct loss of the premium payments we’re paying now. Since the benefits of the insurance policy will ideally never materialize, these benefits are even harder for us to imagine. This means our resistance to paying the cost of the premium remains a powerful factor in our decision making, while the illusory benefits of hedging against risk are taken less seriously.

"You don't need insurance that doubles as a savings account; you need insurance that functions as actual insurance."

Sometimes this aversion to loss can attract people to plans that guarantee a return of your premium.

Unlike typical term life insurance plans, these plans promise a payout even if the policyholder doesn’t die within the policy’s term, so they appear to be an investment rather than a loss.

"These go under various names – 'guaranteed return of premium,' 'whole life,' 'universal life,'" explained an economics columnist. "All of them are also known as 'a bad deal.'" Many experts agree that these plans don't make financial sense for most people.

"You don't need insurance that doubles as a savings account; you need insurance that functions as actual insurance, providing a safety net against the catastrophic loss of your income," says McArdle.

Emilie Goldman, a certified financial planner and founder of Tamarind Financial, agreed, saying, "I think those are products that can make a lot of money for the people who sell them. Most people will be very well served by term life insurance."

For most people planning to buy whole life insurance it’s probably better to just invest the extra money you would be spending on the increased premium for whole life coverage and pocket the returns from that investment.

Planning for the future
Many of us are also inclined to remain with the status quo or the default option. As long as we’re uninsured, it’s always easy to go a little bit longer without getting insurance. Once we have life insurance, we’re unlikely to change the terms even if our circumstances change. We’ll stay in a default life insurance plan that is offered to us by an employer, even though many employer plans do not travel with the employee if he or she leaves the firm.

Employer-based life insurance plans may also be less desirable because they frequently group lower risk and higher risk individuals together, which raises the price for healthy people. Many insurers on the private market offer a discount for individuals who are seen by a doctor and are found to be in good health.

This itself also presents a barrier to entry for many people. People might in theory be willing to go to the doctor to get health insurance, but some find the prospect of actually doing it intrusive or intimidating.

According to behavioral economists, we're also biased towards the present day over the future. Our daily concerns seem much more relevant and real to us than potential worries in the future, and it always seems easy to put off worrying about the future to another day.

This is an easy trap to fall into, because tomorrow always seems like the best time to make an uncomfortable or costly choice. And after all, you might win the lottery tomorrow, which would solve all these problems anyway.

But this reasoning prevents us from making choices that really will be in our best interest, and in the best interest of people we care about. At some point, we have to worry about the future.

And putting off buying life insurance can cost you in the long run. "I don’t think people realize how expensive the product can be if they wait to get it," said Goldman. "For younger people, it’s much less expensive."