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The fair and fallacy of doing cost-benefit analysis with Insurance

An argument I have to frequently counter about insurance is based on “Cost-Benefit” analysis. Well, no person would mention their argument to in that exact phrase but they mean that. That means they argue, compared to the claim (sum insured) amount I may get and the premium I am being charged for that is far lesser. So why should not I take that insurance / feature, though it costs slightly more.

This argument is faced in situations like buying an add-on / rider with the main policy, buying for longer tenure / term, too much (features) for too less (price / premium).

My advice is understand and anchor on to what you NEED.

Consider the options available. For illustration, say, following for offer:

  • P-1 [Primary Offer], a product (policy) that just satisfies your needs with reasonable pricing and there are competing products. 
  • A-1 [First alternative / competing product]: charges slightly more and offers some add-on’s which are not needed / not so much useful to you. 
  • A-2: [Second alternative / competing product] charges the same as of your first choice but offers more features with no extra charge.
  • A-3 [Third alternative / competing product]  And there is one more last thing that offers the features and deals too good to be true.

Which one you chose?

I know, you act intelligently while answering this academically. But put in the actual situation many people make mistakes. The right choice is obviously the one that offers what you need at the best price, no matter how many other extra’s / freebies it has. So, in the above example, ‘A-1’ of the competing products may be considered. Extra features you get with this product are simply the bonus for you. This is ‘Fair’ analysis; rather common sense! You may ask if so, then why not the last option that offers unbelievable deal? Well, mostly it is not sustainable. If something defies the logic, don’t believe it, no matter what endorsements it comes with. Examine deeper and in detail, if you have ability and patience, before you decide to chose such option; your choice of such too good option should be after thorough study to ensure yourself that it is free from some hidden things / fine prints. If you can’t indulge in such detailed inquiry, simply dump it. So, choosing to buy something that charges more to give you the features that you don’t need or buying in to some incredibly good deal by taking things at their face value is a ‘Fallacy’.
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