“I am strong. I am invincible. I am woman.” Those are the words of the song written and sung by Helen Reddy in 1971. The song went on to become a number one hit in 1972, selling over one million copies. While the song became the anthem for the women’s liberation movement, the first two sentences bear a striking resemblance to what young people say when they are first offered life insurance.

Not only do young adults think that talking about death is way premature, being in the pink of health at a young age leads the young adults to conclude that they are near to immune from disability and death. What’s even more alarming is the extension of the above logic that with enough time on their hands, young adults can easily earn the huge coverages that life insurance policies offer.

Humans use heuristics every single day as the latter make everyday living a lot simpler. However, the ease with applying heuristics leads people to overuse them, and this is where errors in judgement crop up particularly with personal finance.

Now let’s take a step back and look closer at personal finance. Like any other planning process, planning for better finances starts with goals. And common sense dictates that such financial goals can only be had through diligent saving and smart investing. Yet, behavioral economics says that common sense may not be that common.

Humans, regardless of race, color, creed, or gender apply tricks to simplify and solve life’s difficult problems of judgment and choice. These tricks are also referred to as heuristics, which are nothing more than rules of thumb, educated guesses, intuitive judgements, and plain common sense.

Humans use heuristics every single day as the latter make everyday living a lot simpler.  However, the ease with applying heuristics leads people to overuse them, and this is where errors in judgement crop up particularly with personal finance.

For example, concluding that a stock is an automatic sell when its price dips is an oversimplification. The reason for the price dip may be poor market-wide sentiment, a one-time non-recurring charge or even a break in the technical support line. For as long as fundamentals are intact, an averaging down strategy could even be recommended.

Going back to personal finance, planning is needed to achieve goals with saving and investing invariably involved.  However, since nothing in life is guaranteed, including investment principal and returns, it would be best to protect one’s downside first.

Of course, there will be resistance to buying life insurance as there is also a heuristic that compels people to avoid losses. And in today’s instant gratification society, life insurance premiums are nothing but losses because cash flows out without any tangible exchange in benefits.

The way to avoid wrong decisions stemming from the overuse of heuristics is to use another heuristic that is more appropriate for the situation.  And in the case of avoiding losses, the trick is to focus on guarantees. Remember, heuristics are simple rules. Using complicated reasoning will not cut it. 

So here is how it works: With investments, one makes a bet that principal is returned, and profits are earned. With life insurance, it is the life insurance company that makes the bet that the young policyholder does not leave the world early. Now is that not, to begin with, the premise of the young adult?

And if ever the young policyholder does move on to the next life early, his estate makes a windfall from the claim on the life insurance proceeds that will ensure, provided coverage is adequate, that his loved ones can maintain the same lifestyle without him or her for a few years (or until they can stand financially on their own feet).

Who can say with absolute certainty that an investment will pay off? No one. Who can say when we leave this world? No mortal can. But at least by executing life insurance strategies prior to investing, the loved ones that may be left behind early in life stand a better chance of recovering from the ensuing financial loss while investments are still building their returns.