The way we manage money isn't always logical.
Emotions, habits and mental shortcuts often influence financial decisions, sometimes without us realising it. Understanding these behaviours can help you make more confident decisions about saving, borrowing, insurance and long-term financial planning.
Money decisions can be influenced by more than affordability or careful research. Our emotions, habits and past experiences can all influence what we do with our money. Sometimes they help us. Other times, they can encourage us to put things off, avoid difficult decisions or stick with choices that no longer suit us.
Understanding your financial behaviour can help you recognise when that might be happening and make more considered decisions about your money. That connection between financial behaviour and protection can be particularly important when deciding how to protect yourself and your loved ones. That can be particularly important when making decisions about life insurance, income protection, critical illness cover and other ways of protecting your dependants financially.
Financial behaviour is the way you think about, manage and make decisions about money. It covers the obvious things, such as spending and saving, but it can also influence how you approach borrowing, pensions, insurance and financial planning.
But it isn’t driven by numbers alone. How confident you feel, what you've experienced in the past and even your mood when making a decision can affect the choices you make. Research into behavioural finance recognises that people don't always process every piece of available information rationally, particularly when decisions are complicated.
Understanding this can be useful because everyday financial behaviour contributes to your wider financial wellbeing. The Money and Pensions Service describes financial wellbeing as feeling secure and in control, being able to manage money day to day, deal with the unexpected and stay on track for a healthy financial future.
Research from the FCA's Pure Protection Market Study found that 58% of UK adults do not hold any form of protection product, such as life insurance, critical illness cover or income protection insurance. The study highlights a significant protection gap, while affordability concerns, competing priorities, low awareness and behavioural biases may all influence individual decisions about cover.
Major life events can bring a lot of financial decisions. Taking out a mortgage, for example, might prompt you to consider life insurance, income protection or critical illness cover, but it’s easy for this to slip down the priority list.
Similarly, when household budgets are stretched, reducing or cancelling insurance can offer an immediate saving, while the possibility of needing that cover can feel much further away.
These decisions aren’t necessarily unreasonable. Affordability matters, and everyone’s circumstances are different. But understanding the behaviours that influence our choices can help us pause and consider both our needs today and the longer-term impact.
If you’re struggling to afford your cover, speaking to your provider or an adviser before making changes can help you understand your options and make an informed decision.
A few simple habits can make good financial behaviour easier:
Unless something is genuinely urgent, try to avoid making significant financial decisions when you're stressed, worried or distracted. Come back to the question when you've had time to think.
"Review life insurance" can be easy to forget, so a good idea could be to put an annual reminder in your calendar.
You could also make certain life events automatic prompts for a financial review, such as moving home, getting married, becoming a parent or changing jobs.
Don't always assume that yesterday's answer is still the right one. If you're reviewing your life insurance or other financial protection arrangements, check your current mortgage, debts, income and regular household costs. Think about who depends on you financially and how long you would want support to last.
Before comparing financial products, start with the problem rather than the product.
For life insurance and related cover, that could mean asking yourself questions such as “what would happen financially if I passed away?”, “how would my household cope if I couldn't work because of illness or injury?” and “what savings or workplace benefits do I already have?”
Sometimes the hardest biases to spot are our own. Talking your situation through with another person can help you challenge assumptions and look at the decision from a different angle. If you want help understanding financial protection products and how they may fit your circumstances, you can also speak to a qualified adviser.
Protection comes with plenty of choices - from how much cover you need to what you can comfortably afford. Price matters, but so does finding protection that reflects your circumstances and what matters to you.
Nobody makes perfectly rational financial decisions all the time. Recognising the behaviours that can influence our choices can help us pause, consider our options and make more informed decisions.
If you've been meaning to review your life insurance or wider financial protection arrangements but haven't got round to it yet, you're not alone. Speaking to an adviser can help make the process clearer. A LifeSearch adviser can discuss your circumstances, explain the available options and help you find cover that suits your needs and budget. Get in touch today to find out more.
Talk to a friendly LifeSearch protection adviser today. Fee-free. No jargon. No pressure. Just clear, human help to get protection right for you and the people you love.
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