Imagine a world where every financial decision was based solely on cold, hard logic. No emotion or bias. Just numbers.

It’s hard to imagine, because that’s not the way the world works.

Because we are human, every decision we make is influenced by the way we think and behave. The scientific term for this is behaviourial economics.

When it comes to life insurance, understanding the quirks of human behaviour can help you plan and protect your future.

How behavioural economics fit into life insurance

It’s essential to recognise that you aren't always rational in your decision-making, especially when it comes to something as emotionally charged as protecting yourself and your loved ones.

People often make choices based on emotions, perceptions, and biases.

By understanding these patterns, you can be better positioned to make financial decisions and choices that align with your long-term needs.

Anchoring: The power of first impressions

Anchoring refers to our tendency to rely too heavily on the first piece of information we encounter when making decisions, regardless of its relevance.

A well-known example is a study by Tversky and Kahneman, where participants were asked to estimate the number of African countries in the United Nations after being shown a random number on a wheel.

The higher the random number, the higher their estimate, even though the two were unrelated.

You may anchor your thinking around an arbitrary amount of life cover, like R1-million, even when your real needs, such as paying off a bond, require more.

You can counteract this by anchoring discussions around your actual financial needs.

Insurers should offer products that tie coverage to specific obligations, making it easier to understand what’s covered and what’s not.

Framing: It’s all about perspective

Framing affects how people interpret information, depending on how it's presented.

For example, consumers prefer to buy milk labelled as "99% fat free" rather than "1% fat," even though both statements have the same meaning.

That why life cover should be framed as protecting your family’s lifestyle, rather than as a lump sum pay-out.

Insurers can support this by providing tools that highlight emotional needs, such as funding a child’s education.

Loss aversion: Protecting what you have

Loss aversion is the idea that people fear losses twice as much as they value gains.

A well-known example comes from investment behaviour, where people hold on to losing stocks longer than they should, in the hope of avoiding a loss.

This reveals our instinct to protect what we already have, even though it may ultimately cost us more.

Life insurance companies can make life insurance more appealing by linking benefits to a client’s income and expenses.

In this way, life insurance becomes more tangible and understandable, compared to offering a generic, undifferentiated cover amount.

Status quo bias: The comfort of inaction

Status quo bias explains why people tend to stick with their current situation, even if change would benefit them.

For example, organ donation rates are higher in countries where citizens are opted in, compared to countries that require people to sign up.

Clients often avoid updating their cover, even as their needs change. Product providers need to offer cover that is flexible and easy to change throughout a client’s lifetime, moving clients away from their default position without requiring drastic action.

Mental accounting: viewing money based on its source

Mental accounting is when people mentally separate their money into different “accounts”, depending on its source or intended use.

Life insurance premiums may be seen as a grudge purchase, rather than as an important investment.

Insurers can help shift this perception by developing products that link premiums to specific needs and expenses, such as cover for children and household needs.

That’s the thinking behind BrightRock’s needs-matched products, which adjust to life’s changes, connect coverage to specific financial needs, and make decision-making easier by appealing to our natural human biases and behaviours.