Imagine that you woke up one morning and found your house on fire. If you only had enough time to grab one of these three things before you ran out of the house, which would you pick?
A briefcase containing $100,000 in cash
A bag of golden eggs worth $200,000
A goose that lays golden eggs
You’ve probably heard some version of this story before. And chances are, you would choose to escape the burning house with the goose. The moral of this story is the thing that will continue to make you more money over the long term is the most precious.
To put it another way, losing your family’s sole breadwinner will be far more devastating than say, losing thousands of dollars on an investment. The investment loss is a one-time affair, but losing the breadwinner jeopardises your family’s long-term financial future.
One solution to mitigating this risk is insurance. Simply put, insurance is a risk transfer mechanism that removes the financial risk of losing an income stream or incurring large medical bills, due to unfortunate events that we have no control over. During times of mishap, a family will already have a lot to deal with emotionally, without having to also be burdened with financial problems.
Most of us understand the importance of insurance as a form of protection, whether against death, illness or medical emergencies. The question here is why are there still so many people who are reluctant to buy this protection.
From my experience, there are three key reasons why people find it so hard to comprehend the importance of insurance.
1. We believe that nothing bad will ever happen to us
Nobody likes to imagine that bad things will happen to them. Instead, we convince ourselves that if we lead a healthy lifestyle by exercising regularly and eating a balanced diet, we will not fall sick.
However, disability and illness can strike anyone randomly, regardless of how healthy or fit they are. For instance, just because you don’t smoke doesn’t mean you are immune from getting lung cancer.
If you are the family’s main breadwinner, covering yourself in the event of a premature death is not a luxury, but rather an act of responsibility. While the risk of premature death might be extremely low, you still want the peace of mind that your loved ones will be financially supported if it does happen.
2. There’s no point in buying anything that we do not intend to use
Would you ever buy a car and not ever drive it? It’s perfectly understandable that we would only spend money on the things that we intend to use.
However, the logic behind insurance is that we are paying something that we hope we never have to use. That increases our resistance towards getting a policy. The truth is, insurance is meant to be useless until you need it. If you don’t buy it now, you won’t have a chance to do so when it eventually becomes something extremely useful.
3. We are not able to see, feel or touch the benefits of insurance
When you want to buy a mobile phone, you can physically observe the features and benefits of a particular model before deciding to purchase it. However, this is not possible with insurance, as you will not be able to “enjoy” the benefits of the cash that is paid out by the policy until something happens.
That’s why most people only start thinking about insurance when something unfortunate happens to a friend or loved one, and start to look for options to protect themselves from the same thing happening.