Why Buying Insurance is Irrational
Although there may be many reasons, there is no purely rational reason for ever taking out insurance. In other words, taking out insurance is a fear-based, irrational decision. Essentially, you are betting against yourself. That is how the insurance companies make money, they make you bet against yourself and they take the other side. Statistically, they make sure the odds are at least 51%49% in their favor. They are playing off your fear and statistically, they win you lose, the majority of the time.
I am not arguing that insurance is not the right decision for you. However, from a purely economic sense, the chances are more likely than not that you will be paid out less than you put in. Why would you ever take those odds? It is not a whole lot different than sitting down at the blackjack table. You know the odds are against you, but you do it anyway. Why? The answer is different for everyone. For you, making sure your child is easily able to afford college may be a good reason to purchase Life Insurance. But your decision to purchase insurance is not based on sound or rational investment principles of risk and reward as the odds to be paid out are certainly against you.
That doesn’t mean that you should not get insurance or that it won’t pay off some of the time, just don’t expect the decision to be rational.