The problem with insuring our emotions


It’s a word that evokes strong emotions, particularly in the years since September 11.

The dangerous thing about strong emotions is they can make us act irrationally at times.

The effect of emotions

I recently read about a study done by a group of economists from Penn State, Temple, and the University of Pennsylvania. In the study, they asked a group participants how much they would be willing to pay for $100,000 of travel life insurance for a trip from the United States to Thailand. They were given two options. In one option they would be covered by $100,000 life insurance were they to die for any reason on the trip. In the second option they would receive $100,000 life insurance benefit if they were killed in a terrorist attack while on the trip.

Are you ready for the surprising result?

The average study participant was willing to pay $14.12 for insurance that would cover them in the event they died at the hands of terrorists. They were willing to only pay $12.03 for insurance that would pay in the event they died for any reason. So they were willing to pay more for insurance that in reality gave them less coverage. You aren’t more dead if you died in a terrorist attack. Why would any rational person choose to pay more for a far less inclusive benefit?

We probably shouldn’t be so surprised by the result. The answer is emotions. The sole purpose of terrorists is to incite intense fear in the folk attacked so as to try to get their way in whatever cause they are promoting. We see the effects of that fear in this study. The word terrorist touches us in a different place and can lead to decisions that are a bit irrational. Obviously the more inclusive life insurance would cover you the same regardless of whether you died in an attack or for any other reason. The fear associated with the word though led the participants to be willing to pay more for less.

Using fear to sell

The insurance industry uses this trick often to entice us to pay far more for much less coverage.

insuring our emotionsCancer insurance

Cancer. Another of those scary words that touch us in a very real place. Almost all of us have lost a family member or other close friend to cancer at some point in our lives, and many times it led to a painful, scary death. So insurance companies capitalize on that fear by offering cancer insurance that will help pay your medical bills in the event you are diagnosed with cancer.

But wait a minute. If you have good health insurance, aren’t you covered in the event you get cancer? Of course you are. Consider this. Why don’t they offer heart disease insurance? Statistically, you are more likely to die of heart disease than cancer. The reason is heart disease doesn’t evoke the same emotions that the dreaded “C” word does.

Mortgage insurance

Mortgage insurance is another product largely sold on fear. Mortgage insurance promises to pay off the mortgage in the event something happens to the mortgage holder. Sign me up. At least if something happens to me, I’ll know that momma and the kids will have the home paid for. It’s a noble thought and very understandable.

The problem is there really is no such thing as mortgage insurance. You aren’t insuring the mortgage. You are simply buying a decreasing term life insurance policy on the holder of the mortgage. By calling it mortgage insurance they can get away with charging several times what a similar term policy would cost.

Credit card insurance

This is a variant on the Mortgage life insurance. Credit card companies often push insurance that’s “only a few pennies a month” that will pay off your cards if you lose your job and are unable to make your payments or if you die. This insurance is often very expensive compared to a comparable term life policy, but it is sold by playing on the same fears as the mortgage insurance.

Accidental Death and Dismemberment insurance

This is another insurance based on fear. These policies are essentially a form of life insurance but they promise to pay extra if your death is caused by an accident. But again the problem is you aren’t more dead if you died in an accident as opposed to some other cause. This is much like the travel life insurance policy that I mentioned in the previous study. You are paying extra for less coverage. The bottom line is you should have enough life insurance to provide for the needs of your family regardless of how you died.

Insuring our emotions

I’ve mentioned just a few examples of these types of insurance. They are really all about insuring our emotions. If they can elicit a strong emotional response in the customer, the customer will make decisions that are not based on logic.

None of this is meant to bash insurance companies. I am a strong believer in insurance and insurance companies provide a very valuable service to their customers. While it is one of the only things you buy in life that you hope you never use, it is still a critical part of having a good financial plan. Just be careful that you don’t let emotions talk you into paying for an expensive policy that you don’t really need.

Have you ever bought insurance out of fear?

Photo credit: Kevin B 3 (creative commons)

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