Reference no: EM133056895

life insurance agent visits a 43-year old, married father of three children. The insurance agent points out that the father is the only working adult in the household, and earns about $130,000 per year. At current earning rates, the father needs 10 years to pay off the house mortgage and put his three kids through university. If the father were to die during that time, the family would be left in quite a difficult financial situation, trying to pay off the funeral, the mortgage, and university costs.

The agent points out that the father has a 4.8% chance of dying by the age of 53, so he should make sure that he gets enough term (that is: time-limited) life insurance to cover his mortgage and estimated university fees for the next 10 years. The total amount of insurance the agent is proposing is $750,000, and will cost the father $76 per month.

The father answers that he doesn't like the price. "After all, if I take the same $76/month and put it into investments, I'll make $9,265 in 10 years. And I have over a 95% chance of living!" The agent answers that this would require an interest rate of 15% annually, and that most investment portfolios these days are lucky to get 7-8. The father answers that he can beat the market norm, because he's good at seeing companies on the rise and trading stock options. He has only gotten 7% average so far, but he's getting better and better at it every day. Plus, he adds "That's $76 hard-earned dollars per month, for TEN YEARS, that is probably - 95.2% chance - just being flushed down the toilet."

The agent also mentions that he commonly works with middle-aged working men, and that virtually all of them with non-working wives and school-aged children see the need in at least term life insurance "just in case," so he thinks the father should reconsider his approach to this matter. Plus, the father is "only a standard health rating." The father answers that his health is not a real concern, because his mother and father both lived well into their 80's.

Do the following things:

-List and describe one or more cognitive biases affecting each of the participants in the argument.

-Give a brief (1-2 paragraph) explanation of what the father should do regarding the life insurance purchase. Justify your answer by explaining how you have reasoned to this conclusion.