The practical rationality of purchasing life insurance

Abstract

Why do people purchase life insurance? If they do, then, is it rational for them to purchase life insurance? In this paper, I will address the intricacies of utilising decision theory as a means to rationally decide if one ought to purchase life insurance or not. I will argue that primarily through the use of expected utility value and the increasing marginal disutility of lost money, it is rational for agents, practically speaking, to purchase life insurance because they will be better-off with than without it. Whilst there may exist agents who, in their non-conformity to the increasing marginal disutility of lost money, may rationally be better-off without life insurance than with it, they are merely outliers. I will prove my thesis in two parts: I will show that it is rational to purchase critical illness coverage, and I will show that it is rational to purchase death coverage, therefore it is rational to purchase life insurance, a combination of the two. I will then propose a possible further research study into the practical rationality of not just life insurances, but also personal insurances using the same justifications for the rationality of purchasing life insurance.