Why we buy life insurance


Why do people buy life insurance? In a logical world, the answer would have been very straightforward.

People buy life insurance because they want to hedge against the probability of death. But is that really the case? The answer is no. Most life insurance that gets sold in this country is not really life insurance in the strictest sense of the term.

What gets sold as life insurance is essentially an investment plan with a dash of insurance. Hence, in most cases people who buy life insurance aren’t really adequately covered. So this brings us back to the question, why do people buy life insurance?

There are multiple answer to this question. I call a certain section of individuals buying life insurance as the “Papa Kehte Hain Types” or the PKHTs. The PKHTs buy insurance because their fathers ask them to do.

The only way their fathers have known to save is by buying life insurance policy regularly from the friendly neighbourhood agent.

Further, a major section of people graduate from being PKHTs. They dabble around on their own and figure out that if you buy insurance policies
save tax. This leads to people accumulating multiple insurance policies, without having much idea of what they are buying. Over the years, I have even known people who have had a dozen insurance policies and struggling to remember, when is the premium due on which policy.

Some others buy insurance because they need to oblige their friends, their relatives, their acquaintances, who have become insurance agents, for the lack of anything better to do. In fact, some portion of the PKHTs also fall into this category of buyers.

Still others are mis-sold insurance when they go into a bank to start a new fixed deposit or carry out some other transaction. In fact, given that I work as a freelance writer, my payments tend to be lumpy. The last time I went to my bank, a major payment had come through, and not surprisingly, the woman at the front desk, tried to sell me life insurance which, she said, would give me fantastic returns.

The moment I asked her, how can life insurance give returns, she got confused, and asked me to speak to her senior.

The point being that nobody really buys life insurance to hedge against the risk of dying. Further, given that most insurance policies are essentially investment plans, nobody really buys them as investment plans either.

The insurance companies are also happy letting people buy insurance for various reasons other than the probability of hedging against their death. Very rarely do insurance company advertisements talk about death. They do talk about investment but in a very vague sort of way, without really getting into the past performance of their investment plans.

As John Kay writes in Everlasting Light Bulbs—How Economics Illuminates the World: “Modern economies include many activities, like selling cars, where product quality and product attributes are complex and sellers know far more about what they sell than buyers about what they buy.” Insurance is one such product.

In case of insurance, the companies rarely go about filling the information gap and educating the buyer, through their advertising. When was the last time you saw an insurance company talk about the fantastic returns that its investment plans have generated? When was the last time you saw an insurance company talk about their premiums being the lowest?

In fact, as Kay writes: “Advertising is about managing that gap in information. And when you look more closely at advertising with that perspective, you see that the distinction between information and persuasion does not really stand up.”

Hence, the next time an agent tries to sell you life insurance, just ask them what has been the performance of their investment plan, over a period of five years, in comparison to other plans offered by other insurance companies.

Rest assured, the agent will not have an answer for this.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in the Bangalore Mirror on April 27, 2016