Do we really need insurance - and why is it so pricey?

By The Sydney Morning Herald

Professor Dan Gilbert gave a group of people small magnets each describing a different life event, with yellow signifying good events and blue characterising bad events, like illness, divorce or losing your job.

He then asked participants to use the magnets to describe one event from the recent past and one event expected in the near future.

At the end of the experiment, the "past" wall was a mix of blue and yellow. However the "future" wall was almost exclusively yellow.

What Gilbert simply demonstrated is that we naturally have an unrealistically optimistic view of the future.

On balance this is a great outlook, as it motivates us to try to keep trying new things and keep moving forward in life. However, this optimism bias can be unhelpful when it stops us making rational choices.

For example, most of us look at the statistical likelihood of having an accident or suffering a serious illness like cancer or heart attack, and regardless of the numbers we assume this will not happen to us. This is why insurance seems expensive because deep down we feel we just don't need it.

There are some other reasons why insurances costs have been escalating, particularly personal insurance such as life and temporary disablement.

Unfortunately this reflects our changing health, with lifestyle-related illnesses such as stress, anxiety, obesity and diabetes becoming more common.

As more of us live sedentary lives with unhealthy diets and insufficient exercise, the number of claims for related illnesses have increased and therefore the cost of premiums has been rising.

What can you do to get the most from your insurance?

Get healthy

You pay more for personal insurance if you have higher risk factors like smoking and high cholesterol. Increasingly insurance companies will be offering discounts for members who have lower health risks, and some are even linking this to positive health indicators like achievement of daily activity targets as measured by devices such as Fitbits.

Compare the risks

Given the compulsory nature of minimum car insurance, most of us can't imagine driving our car without insurance. The reality is the aggregate value of our earnings over our lifetime dwarfs the value of our cars – a salary of $60,000 a year between 20 and 60 years of age is $2.4 million. Yet while most of us would be horrified to write off our car, we don't insure against losing our income.


Think about insurance as a win-win; every year you pay your premiums and don't claim it's fantastic that you have lived through the year healthy, safe and without serious incident. In a year when you have needed to claim, the premium will most likely be a tiny fraction of the payout you receive.

If you want your insurance to be cost-effective, shop around using comparison websites or an insurance specialist, make sure the insurer has all your relevant details and that the cover is the right fit for your needs. But by far the biggest impact on your perception of cost will be taking cover you genuinely believe you need.

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