This post turned out to be a bit long and somewhat technical, but here's my promise - if you can keep with it until the end, the chances are you will feel fooled by insurance companies, but will also be able to save lots of money in the future.
As someone who studies consumer decisions, buying insurance is one of the most fascinating phenomena to study, for several reasons:
- Insurance is a complex product, containing many details, but at the end, there is just one price (premium) to pay.
- Consumers buying insurance need to make many decisions about many "parameters" of the product they buy.
- Insurance sells something in the future (coverage against negative events), that might happen or might not - who can predict his own future with accuracy?
- The product sold is very emotional - it is related to negative events with big and bad impact. Most people have a hard time entangling their emotion about the event itself and the decision of how much coverage to buy.
- The insurance industry (in the US) is rather competitive, so the products are abundant, advanced and should be fairly priced.
- People make the decision to buy insurance over and over again, many times annually for a period of 30-40 years. This means there is ample time and information for learning from past mistakes.
I am fascinated by this phenomenon, since it shows how firms produce a complex, emotional product and profit on consumers' inability to understand too many details, or their plain fear from negative events.