The financial benefits of insurance only accrue if a covered event actually happens. If our house burns down or our car gets damaged in an accident for instance, if we are insured, the insurance may then kick in and help us recover financially.
We never want to see events covered by insurance get triggered, as these always involve things that are both upsetting and end up costing us money and often a lot of money. The primary goal of the insurance is to look to bridge the gap between where we were before the event and where we are now, and this may or may not return us to our original financial situation but the insurance benefits we receive do get us closer to that.
If we plan properly, the goal of this coverage is to at least avoid the big stuff as far as financial loss is concerned. We never want to shoot to cover everything, and the financial impact really needs to be big enough that we are willing to pay more than the coverage is worth on a balance of probabilities.
We are hoping that the perils that insurance policies cover never happen, and in a lot of cases they do not, and this is true with life insurance as well. We have to die before any benefits are paid, and one’s death can be seen as the ultimate peril.
Therefore, to benefit from life insurance financially, we have to die, and generally not want to, as things like taking one’s own life are not covered. From our own perspective, there are no financial benefits from life insurance nor is it possible for there to be, as we would have to return from the dead to enjoy any financial gain here, which is of course not possible.
Your Loved Ones Benefit Financially Though with This
There are of course financial benefits to our loved ones if we die and have life insurance and it is paid out, although benefit isn’t really the right word here. Rather, your loved ones may have financial losses that have occurred as a result of your death compensated for by the policy, where they are better able to manage their financial affairs with the insurance payouts.
While it is certainly possible to improve the financial situation of our loved ones with a life insurance policy, this is not a good idea generally, because this is not an efficient allocation of our funds. We do pay a premium for all insurance coverage, which means that it has and must have a negative expectation overall, when we calculate what we pay for it and what our expected benefits may be.
What insurance coverage does accomplish is to lessen the blow from the events we are seeking to protect against, and we can therefore classify this benefit as neutral at best, where the most we should expect is no financial change at all when the insured event occurs, and most often, that the event does not cause us to be in a substantially worse position financially.
Given that our death may have serious financial consequences to our loved ones, this is the primary reason why we purchase it, and why it often is a very good idea to purchase. We are buying the policy, and cannot possibly benefit from it directly, so the reason why we do it is purely out of concern for the future welfare of those we may leave behind if we die during the life of the policy.
We Don’t Need to Die to Enjoy the Psychological Benefits Though
While the potential financial benefits of insurance do require us to see the peril that is protected against come to pass, our dying in the case of life insurance, there is another big benefit of insurance and life insurance and that’s the peace of mind that insurance provides.
While we don’t normally focus on the psychological benefits of insurance as much as we should, even though insurance sales people are quick to point these benefits out to us, these benefits can really tilt the scale in favor of becoming insured whenever there is a need.
If we are do not have sufficient coverage for something or perhaps no coverage at all, any time we reflect upon this, this situation can and very often does cause us stress. People generally have a tendency to worry and worry too much in fact and lack of proper coverage is a worry that is often quite justified.
It’s not a good idea to worry too much of course, but many people struggle managing this and this is usually not an easy matter to just set aside. We do not have to be actively thinking about something to have it bother us, as worries are very often under the surface of our minds and cause our quality of life to diminish and even manifest themselves in physical afflictions.
There are two main ways to address problems that bother us, which are to seek to understand the situation and dial down the concern to a more appropriate response if we are overreacting, as we often do, or to look to address the source of the concern.
Life insurance coverage looks to address the problem directly, as if we’re bothered by the potential ill fate of our family if we die unexpectedly, purchasing life insurance to protect them against this can reduce or eliminate this particular concern.
When we do so, we’re not only providing for them if we die, we’re also benefiting ourselves by enjoying greater peace of mind which can directly affect our well-being and ultimately our enjoyment of life.
These psychological benefits are not only enjoyed by ourselves as the insured, they also extend to our loved ones as well, those protected under the policy. They can also enjoy the peace of mind of knowing that our dying isn’t going to impact them as much financially, and this can mean quite a bit to everyone involved.
The Psychological Benefits of Life Insurance Is Actually the Main Benefit
Therefore, when we look to calculate the overall benefits of life insurance coverage, we need to account for both types of benefits in our calculation, the financial ones that we hope we won’t have to use, and the psychological benefits that we will enjoy during the life of the policy regardless.
In most cases with life insurance, the coverage is taken out during times where the likelihood of our dying during the life of the policy is quite low. This is comparable to getting fire insurance on your home, where it is unlikely that this will happen to you, but if it does, you are covered.
If, for instance, there is a 1 in 1000 chance of your losing your home to fire, this is a low probability event indeed, and if your home is worth $200,000, we could say that the expected value of this policy is 200,000/1000 or $200. You will pay more than this for the coverage but the extra money you pay is worth it because you cannot handle losing your home if this does end up happening to you.
Life insurance is a lot like this, and it’s not like the probability of your dying during the life of the policy is 1, even though the probability of your dying is certain. Life insurance really isn’t efficient when your chances of dying are higher, and often you cannot even obtain substantial coverage at this point, beyond getting covered for things like your funeral costs. The costs of these coverages will tend to be higher as well and this is only a good idea for those who will not be able to bear the cost of these final expenses without it.
Most life insurance policies, therefore, do not involve benefits paid out, and are more like fire insurance where we’re protecting against lower probability events. This coverage can certainly be justified in itself without considering the psychological benefits of it, but overall, the benefits of peace of mind does factor in to the equation quite substantially.
It is only when the coverage makes sense and is worth it so to speak that these psychological benefits should kick in, as we should not be made happy by entering into contracts that do not benefit us otherwise, even though a lot of people don’t examine such things all that closely.
When we do get value from an insurance policy though, the psychological well-being that is added to this can really add to its value overall, to the point where we may even be able to say that this is the main benefit of life insurance.
Everyone that is affected by the life insurance coverage stands to benefit psychologically from it, and does so regardless of the outcome, whether we do end up dying during the coverage period or not.
Given that it is quite unlikely that we will be using the coverage, not quite as unlikely as your home burning down but still of a low probability, and the likelihood of our enjoying the benefits of the peace of mind that the insurance provides us being certain, this is why the psychological benefits of life insurance can be seen as the more substantial of the two.
People do indeed take peace of mind benefits into account, but perhaps not enough, and peace of mind can be enough of a reason in itself to want to be insured, including wanting to be protected by life insurance. We do want to make sure that the coverage makes sense for us and that there are not better means of achieving this peace of mind, but peace of mind is plenty important and this should be a primary goal of ours in managing our finances and our lives.
Chief Editor, MarketReview.com
Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.
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