You make a very good point. I think the reason people fear self custody is because they think it's technically complicated and they probably only think of having a hot wallet on a GUI software on their computer, which agreed isn't a safe location to store crypto long term. However in recent years we have seen more and more exchanges be compromised, so the notion that storing their holding with an exchange is safer and easier, is a false sense of assurance. So much easier to just buy a hardware wallet.
definitely, the notion that saving money in exchange will be guaranteed with SAFU funds is just an illusion, I'm sure if somehow exchange got hacked and the money lost, the reimbursement process will be a lengthy one so why not just invest in a hardware wallet and call it a day.
but I know some people who don't want to use hardware wallet because it costs them money despite holding good amount of BTC and just settles with the exchange saying that the regulation will keep them safe. honestly that couldn't be more further than truth, as people said here, not your private key not your money. one can learn from the case of FTX and MT.Gox.