7 Reasons Why We Need Life Insurance

We buy life insurance as a solution to life’s problems and opportunities. In Singapore, as people become more financially literate, the percentage of us enjoying insurance protection has increased since the mid-1900s. Here are 7 reasons why we need life insurance:

1. Protection against premature loss of income

“The greater your income, the more you stand to lose. The less your income. the less your family can afford to lose.”

broken piggy bank -wipe savingsTo put it simply, we need life insurance because we may “die too soon”. Nobody knows how long one’s lease on life will run before it expires. Life insurance provides the means to ensure that an early, untimely death will not wipe out the potential income that could be used to support the family.

Insurance is particularly useful for a married man with a wife and a few young children. All his hopes and dreams of making a decent provision for his family would be dashed by one unfortunate event – death.

For just three cents, the dollar can be protected. No other financial instrument can do this so well.

2. Provision against disability

One common misconception about life insurance is that you have to die to benefit. Sometimes death could be more merciful and quick. But what if you don’t die but linger on disabled?

Would your cost of living increase? YES. Would your income continue? NO! What a terrible combination – to be alive yet not having an income, coupled with increased cost of living!

Certainly, your family can take care of you. But don’t you wish to make things easier for them by providing the means to take care of you? Sometimes, people say that if anything happens to them, their brother/sister will take care of them.

Assuming the roles are swapped, it’s not you but your brother who is disabled. Now, how are you going to look after him? Wouldn’t it be much easier if he passes you $10,000 every year to defray some of the expenses?

3. A worthwhile “investment”

How would you define a good investment? Too often, only one criterion is mentioned – rate of return, usually measured in terms of interest. Apparently, the most meaningful definition of a good investment should be – It pays best when needed most.

When something untoward happens, life insurance provides a guaranteed “investment” return. Although we will never wish to benefit from this investment, it pays us at the moment when needed most.

4. An expression of love and care for family

“It’s a mistaken kindness or misappropriated affection, to provide so well today that inadequate provision is made for tomorrow.”

family

This is life insurance at its best. The average person may feel that buying various gorgeous/cool gifts is a good expression of love and concern for the family. So, he buys a car so the family has a convenient form of transportation, on instalment. He buys a huge 3D smart TV for the entertainment of his wife and children, on instalment. All is well and good, provided he lives long enough to see the end of the payments. But should the unexpected happen, every item on hire purchase will be taken away, leaving broken dreams and unfulfilled wishes.

Children are told to study hard, not just for today, but to be ready for tomorrow. By buying life insurance, the parents have demonstrated a live example for the children – by taking care of tomorrow today, the future will take care of itself.

5. Peace of mind

“Death comes everyday to someone and someday to everyone.”

It is the only certainty in life, other than tax maybe. When a responsible person knows that he has made sufficient preparation for a predictable event in the future, he feels a sense of peace with himself and peace within himself.

Still, there are people who prefer to worry and take a risk. To be under-insured is the biggest gamble you can take. And it is a particularly tragic one, for if you lose, it is not you but your loved ones who lose. Why worry when you can insure? In fact, why worry when for a small regular sum you can let the insurance company do the worrying for you?

6. A security against creditors

“Sir, this bag of money can only be given to your wife and children. Nobody else can touch this.”

loansharkA person will never know when a creditor may turn up. And when the creditor comes, usually this will be at the worst possible time when the family can ill-afford it. How sad to see houses and all types of assets being taken away because creditors have a legal right to them.

No widow should suffer the additional hurt of having her assets re-possessed because provision was not made for some money to be creditor-proof! The proceeds of a life insurance policy can only be received by his beneficiaries and is protected from any creditor.

7. Tax Relief

This used to be a popular reason for buying life insurance. Your premium paid on your policies is considered as a tax deduction – it will not be part of your income that is taxed! It is a reward for looking after your own future needs.

People in the lower income bracket will also find this reason to be a good incentive to cover themselves.

Is Paying for Insurance a Gamble? Your Biases Could Hurt Your Finances

 Some people may feel that paying for insurance and gambling are similar because in both cases, a person sets aside a smaller amount of money in the hope of getting a disproportionately larger return. Let’s look at the 3 behavioural biases in gambling psychology which could affect your insurance planning – framing effect, loss aversion and optimism bias.

1. Framing effect

The most significant bias experienced by us is that of the framing effect of insurance pay-outs. In gambling, the benefit is the immediate gain of the money wagered. One can immediately experience the joy of winning.

Insurance, on the contrary, has benefits which are not easily foreseen. Is it an asset or a liability? Why should I be paying money to cover an event that I do not wish would happen? Decision making behind insurance purchases is in direct conflict with many of our common product purchases. Would I buy a computer and not use it? This bias is stronger towards insurance due to its benefits being intangible. When a product is too complex, we tend to procrastinate decision-making and thus, insurance is often neglected among our priorities.

2. Loss Aversion

Humans are highly loss averse.  We have a stronger tendency to avoid losses than to acquire gains. Empirical estimates that from a gambling perspective, the pain of losing $100 is at least twice the joy of gaining $100. So, if people are more loss averse, does that mean people are more likely to buy life insurance? The purpose of insurance is to protect us and our family against huge financial losses from catastrophic events right?

Unfortunately, the thought process of a consumer on the street is even simpler than that and the following video is indeed a cause for concern.

A probable reason for this finding would be that people view paying insurance premiums as a guaranteed loss, while the insured event is just a possible loss. When one is faced with a small guaranteed loss versus a larger possible loss, as behavioural studies suggest, many will choose to take a gamble and NOT buy any/sufficient insurance. Many people risk having their savings wiped out and find themselves severely lacking in insurance coverage ONLY when disaster strikes.

3. Optimism Bias

This is a well-established bias that causes someone to believe that they are less at risk of experiencing a negative event compared to others. Will a gambler walk into a casino thinking he is going to lose money? The answer is almost definitely no as we are often filled with high hopes of making a profit.

On hindsight however, many gamblers will feel that they should not have started gambling in the first place. Unfortunately, this realization usually comes only after one has suffered a significant loss. Optimism bias always leads one to overestimate the chances of winning and underestimate the risks of losing.

The same logic applies for insurance. Most people feel they will certainly live a healthy and accident-free life. (Honestly, who doesn’t?) Sadly, life is as predictable as the September 11 attacks and we can’t use a crystal ball to find out what happens tomorrow.

Insurance planning is an integral part of one’s financial plan. In the event of a thunderstorm, only those who carry an umbrella can be sheltered. People who don’t have an umbrella end up drenched. A well-planned insurance portfolio is the exact opposite of a gamble. Without sufficient coverage, we are gambling with the financial future of ourselves and our loved ones. Given the little insurance planning most Singaporeans have, many people may be “gambling” without realizing it.