Probability as it pertains to life insurance is misunderstood.  In fact, our brains not well-suited to understand the probability of certain occurrences happening.  We see this in our fear of flying and our embrace of driving for example.   Maybe we don't want to correctly analyze the probability of a catastrophic event occurring in an effort to somehow avoid it happening.  Let's look at probability and how we can protect against the unforeseen with term life insurance.

Our brains just aren't built to correctly understand probability.  There's a very interesting book called "The Drunkard's Walk" which delves into this mismatch.  Unfortunately, probability is all around us and we need to protect ourselves and our loved ones from financial, medical, and other catastrophes are at their foundation, are based on probability.  Let's take an example to help correctly frame our understanding of the need for purchasing term life insurance.

There are three closed doors.  Behind one door is a great prize and behind the other two, nothing.  You are asked to choose one door.  You randomly pick Door A (which remains closed).  A host then opens Door C to show there is nothing there.  You are then given the choice of keeping your current choice (Door A) or switching to Door B.  What should you do?  The answer is counter intuitively that you should always switch.    Most people will assume the odds are 50-50 now between the two remaining doors and decide that there's no reason to switch.  That is incorrect and if you're like me...it will take some time and a great deal of disbelief to understand why.  Computer models have randomly run this experiment and show that Door A in this example has a 1/3 chance of being correct while Door B has a 2/3 change of being correct.  That's double the probability that the prize is behind Door B and you should switch.  Why??   The probability that your original choice was correct is 1/3 in the beginning of the experiment.  The probability that it's incorrect was (and is) 2/3.  Opening Door C does not change this initial probability.  The fact that the host has revealed Door C just shifts the probability for Door B to 2/3.

What does all this have to do with the need for life insurance?  One reason many people put off buying life insurance is their perceived sense of the probability that something will happen.  We constantly hear "I'm healthy, I don't need life insurance".  That's now probability works.  We all have a chance, unfortunately, of passing away early.  Let's face it...it's scary.  But that's the issue...we must FACE it.  When people hear statistics, they tend to assume they will be on the "good" side of fate.  This is especially true when it saves them money each month on life insurance premium.  It's natural.  Unless you have a "glass half empty" mindset, given a statistic that 4% of the people in your age band will pass away in the next 10 years, you mentally place yourself in the other 96%.  I admit that I do it as well and I see the need for life insurance coverage every day with our clients!  Our brains just aren't well-adapted to the world of probability and risk.  In the example above, everyone (translated EVERYONE) has a 4% chance of triggering a life insurance policy.  It may seem like a small percentage...one we can safely avoid or sweep under the rug...but it's still there.  If it we're 50%, the life insurance rate would be $500 instead of $50 monthly. 

It doesn't make sense to avoid this risk.  The better move is to use a tool like affordable term life insurance to address it and THEN we can go back to the safe pastures of knowing we'll be in the 96% (while addressing that nasty 4%).  Let's switch to Door B where the protection of term life and piece of mind awaits us.