When we’re thinking logically, we know we should buy life insurance. And yet so many of us don’t.
When asked about it, people say it costs too much, or they don’t have time to sort through its complexities. But those may just be excuses cooked up by the subconscious, according to a new study.
The decline of life insurance
Over the past half-century, the share of Americans who own life insurance has dropped from 70% to an all-time low of 59%, according to Jennifer Douglas, associate research director at LIMRA, an insurance and financial services industry research group. “We’ve been looking at that decline for decades now.”
For years, LIMRA has asked people why they don’t buy life insurance. Insurers have then tried to address consumers’ responses by marketing lower-cost life insurance policies that are easier to buy, and by explaining why insurance is important. But that hasn’t helped boost insurance rates.
So researchers dug into reasons we weren’t even aware of.
“A lot of our decision-making is often unconscious,” Douglas says. “People often can’t tell us why they do what they do.”
The real reasons we don’t buy life insurance
LIMRA’s study points to subconscious biases that work to keep people from buying coverage, even if they know they’re someone who needs life insurance. These are deep-seated tendencies that evolved to help us survive but that work against our interests when it comes to life insurance.
1. Loss aversion
Loss aversion means we really don’t like to lose stuff. If offered the choice between losing $500 for sure or possibly losing $1,000, we’ll take our chances on the bigger loss rather than suffer the certain one. But when you flip the scenario and offer to give us $500 for sure or just a chance at $1,000, we’ll take the sure $500. We hate to lose even more than we like to win.
Life insurance involves a certain “loss” — the money spent on a policy. So people go without and risk a much bigger financial loss later for their family.
2. Present-day bias
Present-day bias means we tend to put the needs of today over those of the future. “Today’s always more important than tomorrow,” Douglas says. But life insurance is all about protecting the future.
Howard Kunreuther, a professor of decision sciences and business and public policy at the University of Pennsylvania’s Wharton School, notes that young people think of death as something that won’t happen to them — at least, not soon — so they don’t plan for it. Today’s needs are more pressing than this seemingly remote future event.
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3. Default bias
Default bias is the tendency to leave things as they are. As an example, Douglas points to reports that organ donation rates are significantly higher in countries where driver’s licenses identify people by default as organ donors, requiring them to opt out if they don’t want to donate. This is one reason more companies are making employee contributions to retirement plans the default rather than leaving it up to workers to choose to participate.
In the case of life insurance, this built-in inertia leads us to convince ourselves that any group life insurance we have through work is sufficient.
How to get us to buy life insurance
Now that life insurance companies are on to us, expect companies to start speaking directly to our subconscious biases. In fact, LIMRA’s study did just that by testing various messages.
For instance, one way to address loss aversion is to talk up life insurance as a good deal, particularly when customers buy it when they’re young. While we don’t like to “lose” money, Douglas says, “we also don’t want to lose out on getting deals.”
Douglas says insurers can address present-day bias by focusing on getting an immediate reward with life insurance: peace of mind. They also can remind us, gently, that death can strike at any time.
“Our marketing used to be really dark, and we would talk about death,” Douglas says. “Maybe we need to go back to that a little bit.”
Pointing out that group life insurance obtained through an employer might not be enough is one way to try to address default bias, although this doesn’t seem to motivate people to act, Douglas says. Another idea is to talk about how fast and convenient it can be to buy life insurance.
No single message resonates with everyone. Pointing out the value of life insurance is compelling to people who already are “primed” to buy life insurance, perhaps because they recently got married, are buying a house or just had a baby. The “peace of mind” argument succeeds on those who have family to protect but no insurance already. “Convenience” can work for people who have decided they should buy life insurance — but it also devalues insurance in the eyes of other consumers, who think it wouldn’t be so quick and easy to get if it really were so important.
The importance of social norming
The most broadly effective message LIMRA tried out was associated with another psychological phenomenon: social norming. That’s the notion that we’re like herd animals and will do what others do.
A 2009 test by the British government, for instance, found that people were more likely to pay their taxes on time when they received letters saying most of their fellow citizens did so than when they got a warning about the potential consequences of failing to pay. Response rates increased even more when the letters said most people in their postal code or town paid on time, according to the Harvard Business Review.
Decades ago, life insurance agents went door to door selling policies and collecting premiums, so people saw that their neighbors had coverage, Douglas says. These days, agents don’t come to the door, and we don’t talk about life insurance much with others.
When asked, many consumers tend to think that their friends don’t have life insurance or have only group coverage through work, Douglas says. In one focus group, she says, a consumer said the only time we hear about big life insurance policies is when someone takes a hit out on a spouse in order to claim the money.
Ask people if life insurance is for them, and they’ll generally say “yes,” eventually. “It was one of the slowest response rates,” Douglas says. That indicates they had to think about it.
Don’t worry, this doesn’t mean insurance companies will be dispatching agents to bang on doors again. Rather, expect to see more ads talking about how life insurance is right for you, and informing you that people like you already have policies.
The problem with young husbands
Many life insurance advertisements talk about the need to protect your family financially. That’s a message that particularly resonates with older husbands, who tend to view this as their role, Douglas says. But younger husbands generally see their spouses as equal financial partners who could carry on without them. That means more ads aimed at encouraging young wives to consider how they would manage without their partners.
The important takeaway for all of us is to recognize that our psychological biases are there and account for them, Kunreuther says. “You can’t all of a sudden change them.”
For instance, while we might not want to contemplate an immediate untimely end, we can focus on the possibility of death over the stretched time horizon that life insurance policies are designed to cover.
We also must consider what would happen to our families if we died without life insurance, Kunreuther adds. “That’s a horrible thing to think about.”
If you’re not going to let your subconscious get the best of you, explore prices with the NerdWallet life insurance rate estimator tool.
Image via iStock.