Does buying life insurance decrease your risk of death?

There’s a discussion going on at the Canadian Money Forum about the cornerstones of good financial planning, and the topic of life insurance has come up.

One contributor suggested the purchase of life insurance may increase your risk of death, because there are now financial gains to be made. Another community member responded that the purchase of insurance, by itself, will not increase the chance of your death.

It seems obvious that the chance of dying is not influenced by buying life insurance. Right?

Except it might be.

There are a couple of interesting phenomena from the world of medical science known as the healthy user bias and the compliance effect – both of which provide surprising evidence about what keeps us alive and healthy, paying life insurance premiums instead of collecting the payout.

What am I talking about?

First, let’s take a look at these two findings from medical research.

Put simply, the healthy user bias holds that “people who faithfully engage in activities that are good for them — taking a drug as prescribed, for instance, or eating what they believe is a healthy diet — are fundamentally different from those who don’t.”

The compliance effect is a component of the healthy user bias. It finds that people who comply with health recommendations “are different and healthier than people who don’t.”

These two effects have been confirmed in large-scale clinical studies of various health conditions. Over and over, researchers have found that people who take what they are prescribed for a health condition – even if it is a placebo – fare better, health-wise, than those who do not.

And the positive effects for the compliant population spill over beyond whatever condition is being treated – compliant users are less likely to suffer not only from the studied condition or disease, but experience reduced rates of death from homicide, suicide, and accidents, as well.

How might these two findings be related to life insurance?

To be sure, life insurance salespeople are not doctors, and I’m not sure you could “prescribe” the purchase of life insurance for those who need it.

However, there is expert consensus that appropriate risk management, which includes the purchase of life insurance when required, is a foundation of good personal financial planning.

So if the “healthy user” and compliance effects hold true outside the world of medical science, perhaps people who purchase life insurance as a risk management strategy actually experience decreased risk of death from all causes. Perhaps, like in medical science, healthy and compliant users fare better than others.

Now, the world of economics has a particular way of thinking about insurance, which includes the concept of moral hazard. This concept holds that if someone is protected against the risk of loss associated with some behaviour, they may be more likely to engage in that behaviour. Insurance analysis is particularly attuned to this concept, as it is thought to increase the incidence of losses, and thus insurance payouts, for the insured population.

So, If the idea of moral hazard holds true in this case, people who purchase life insurance may be more likely to die than people who do not, because the presence of the insurance coverage is there to compensate the purchaser for their loss. (The idea of moral hazard is much more complex than this brief treatment.) And this is the outcome which the participant on the Canadian Money Forum may have been pointing to.

Except – what if the healthy user bias and the compliance effect extend not just to our physical health, but more broadly to our financial well-being?

Here’s the paradox: if you buy life insurance only because you hope it might reduce your chances of death, and not as a component of an overall set of choices which pay attention to risk management, it probably won’t have that effect.

But if you buy life insurance as part of an overall healthy lifestyle – not for any potential financial gain, but because appropriately managing risk is how you live your life - you may just recoup the benefits of that choice with a longer, healthier life. You may have an increased life expectancy, because you have put yourself into that group of people who are “different and healthier” than people who don’t make those kinds of choices.

What say you?

Photo credit:  by anarchosyn via Flickr