Why do so many people continue to ignore the financial risks of illness or injury, even when it’s easy to safeguard against them. The answers lie in behavioural science, the science of human behaviour, which has some fascinating lessons on the mental shortcuts that lead us to discount future risks, and how you can overcome them.
Better the devil you know
Behavioural science shows us that people tend to favour the known over the unknown.1 So, when faced with a choice, we prefer to take a risk we’re more familiar with, even if the odds mightn’t be in our favour. It’s a case of “better the devil you know”.
Unfortunately, that doesn’t always work to our advantage. For example, our desire to avoid uncertainty often makes people stay away from the stock market because of the unknown risks, preferring to leave their money in a bank account with a known, but much lower, return.2
When it comes to our health, it’s difficult for us to estimate our chance of getting sick or injured and ever needing to claim. That can make it hard to see the importance of life insurance – even when it could make a big difference to our financial security.
Overconfidence rules
It’s a natural human instinct to be optimistic. However, people often fall victim to something the scientists call comparative optimism. This is where they believe they won’t be the one to suffer from an unlucky injury or unfortunate illness because bad things only happen to other people.
This overconfidence can make us think life insurance is something other people should have but we don’t need – even though that’s probably not the case.
We focus on today, not tomorrow
When we make choices in the present moment, we tend to be impatient and seek immediate gratification. This is because we all have what’s called a present bias.
For example, we might find it difficult to resist buying something today, even if we have to put it on credit.
This carries through to other parts of life too. While we all have the best of intentions when it comes to our health and our finances, how many times have you heard someone say, “the diet starts tomorrow?”
So it’s little wonder some people shy away from paying a small life insurance premium today, even if they know it could benefit them in a big way down the track – we’re just not wired for it.
We’re inundated by too many choices
We tend to think more choice means more freedom, but does it improve our lives? Having too many options can actually lead to lower levels of satisfaction, and sometimes even unhappiness.
It can cause us to choose the ‘default’ option, or perhaps put off or avoid making a decision altogether. Researchers call this phenomenon choice overload.3
To handle this, most of us have developed mental shortcuts. For example, we go with the choice we’ve already made before or allow ourselves to be guided by whatever everyone else has chosen.
That’s why, when considering the many life insurance options, it can be useful to talk to a financial adviser. They can help you understand your individual situation so you can make an informed choice that will suit your individual needs.
Life insurance can help save us from ourselves
The modern world presents us with complex decisions every day, and our choices often involve risks and benefits we’ll only see in the distant future. This can make it hard to know what’s best for us.
Life insurance is designed to accurately assess and price our personal risk. Taking out cover can help to mitigate against any negative outcomes associated with our instinctive human behaviours, such as the tendency to be overconfident or avoid uncertainty.
Life insurance also gives us confidence that we’ve got suitable protection for ourselves and our loved ones.