This has really made insurance click for me because while I understand it intuitively, I wanted a more scientific foundation to understand its value.
I think a great illustration is an extreme case. If I have a house and just enough income to cover all my needs and wants (including retirement savings), then depending on my attitude an extra $1000 per year might have no effect at all - I have nothing I want to spend it on and nothing to save for.
But losing my home would still be devastating. So the utility value of the $1000 per year for the rest of my life is low or none, but the utility value of the previously earned money I would lose from losing my house is high.
I think a great illustration is an extreme case. If I have a house and just enough income to cover all my needs and wants (including retirement savings), then depending on my attitude an extra $1000 per year might have no effect at all - I have nothing I want to spend it on and nothing to save for.
But losing my home would still be devastating. So the utility value of the $1000 per year for the rest of my life is low or none, but the utility value of the previously earned money I would lose from losing my house is high.