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Holding onto a life insurance policy because you want to recapture the premium you’ve paid into the policy is playing exactly to the insurance company’s hand. The reason they love to have so little cash surrender value in early years, is related to the thin margins they pull from a life insurance policy at this time.
There’s a lot that one misses out on if they allow themselves to fall for this trap. The opportunity cost can be substantial.
This is a prime example of throwing good money after bad and failing to understand sunk costs.
You can’t undo a bad decision. You have to understand that it is what it is, you made a mistake and now you have to move on. Economists have been proving this with numerous examples for years.
Businesses are generally good at making these decisions. That’s why we see some companies spend millions on ideas only to drop them quickly at a loss to move onto better things.
We commonly advocate for looking at the bigger picture, you have to look more closely at the long term ramifications of sticking with a bad deal. It's best to cut your losses early.
One must be able to evaluate things in their entirety. If you are wasting money trying to break even on a life insurance policy, so you can then move into a better policy later, you are generally sacrificing a lot of performance you could get out of the better policy now.
To put things in perspective, think about about the television production business. Every year companies develop hundreds of new shows. Some are produced, filmed and edited only to never air. Some air and fail completely. And some make succeed moderately only to become smash hits later on.
Either way, they don't dwell on the failure, they cut the loser and move on with a winning strategy.
Big take away, life insurance products are designed to make people pause and hold onto sunk costs. It’s an ingenious way to ensure persistency. Surrender charges are even better tools used to accomplish this. They are using the data and observations made in the Kahneman-Tversky study on gains and losses.
