A Canadian's random thoughts on personal finance

Sep 13, 2010

There's no such thing as marriage insurance

Frank at Bad Money Advice has an article on marriage insurance. In this article, he goes to some lengths to determine whether marriage insurance is worthwhile. He does this by calculating the odds off a payoff and comparing with the amount of the payoff.

I think this analysis is misguided. I have a simpler one.

To begin with, you need to understand this: you never ever buy insurance on the hope that it will pay off. If you ever find yourself doing that, you've made a mistake, because then you're not buying insurance; you're making a wager, pure and simple. When you buy insurance, you should always be hoping it will never pay off. You should be hoping that your money will be wasted. When insurance pays off, it's because you rolled snake-eyes in the game of life and you could end up being ruined financially.

Insurance is meant to eliminate that risk of financial ruin. However, for this marriage insurance, the 1.63x payoff relative to the premiums makes this impossible. I can't think of anyone who can afford to pay $X for nothing, yet would be financially ruined by having to pay $1.63X during a divorce.

Therefore, this marriage "insurance" product is not insurance. It is gambling.


Michael James said...

I agree that insurance is for low-probability, high-cost events. In this case, it is just gambling. However, gambling isn't always bad if you get the right odds. Of course, if a company offering "marriage insurance" gets the odds wrong and you have to pay up front, maybe all the money will be gone before you can collect your "winnings".

Dd said...

I think the big issue is that there is marriage insurance at all *gag*

That topic aside, I think it is alright weighing the probability of something happening verus what it will cost--how else are you to know if you should buy it or not?

Patrick said...

@Michael: You're right of course. If the expected payoff exceeds the premiums (especially in terms of utility rather than dollars) it's a good wager. But insurance companies never offer such deals. Divorce is such a high-probability event (about 50%?) that there's no way a solvent insurance company could offer a payoff that would avert financial ruin with an affordable premium.

@Dd: Agreed that the likelihood of payoff and the cost of the insurance are both relevant; just not in the way that many people think. You don't decide on insurance by evaluating the expected payoff, because for any sane insurance policy, the expected payoff is always negative, or else the company couldn't profit. That doesn't mean insurance is a bad idea. You decide by looking at how much you're willing to pay to avoid financial ruin.

insurance_guy said...

Patrick - you're absolutely right in that "When you buy insurance, you should always be hoping it will never pay off. You should be hoping that your money will be wasted. When insurance pays off, it's because you rolled snake-eyes in the game of life and you could end up being ruined financially."

The problem is that with regard to divorce, the odds are phenomenally high when compared to calamities that we currently insure ourselves against. The odds that anyone will divorce if they're on their first marriage is 1 out of 3 (32%). Wait a minute, that's 100 times higher than the risk of your house burning down according to national statistics. That's even higher than auto accidents (1 in 4 that you'll get into a serious auto accident in the next decade), and auto insurance is mandatory! And don't feel safe just because you've reached past that 8 year mark by which most 1st marriages fail, because there's a big spike right around year 20. Look at Al and Tipper Gore if you think anyone is immune. In fact, today more and more people divorce after 30 years of marriage.

And for people already on their second marriage? Chances are high they already know the devastation that divorce can cause but their odds of marriage failure are 2 out of 3 (67%). Third marriages are almost 3 out of 4 (72% fail). The reality is that the risk of divorce is real and tangible and the cost of divorce is financially ruinous to most people.

If you knew you could lose 3/4 of your net worth from a single disasterous event, you'd surely try to insure yourself against that risk if you could. And unfortunately that's the reality. According to a study by Ohio State University, on the average, people lose 77% of their net worth as a result of divorce.

Of course you'll be surprised to learn it's already available. Go to www.wedlockdivorceinsurance.com and find out exactly how it works.

Patrick said...

@insurance_guy: Thanks very much for leaving your comment. I appreciate your leaving a thoughtful reply to what was not much more than an off-the-cuff rant on my part.

In you example of the divorcee losing 3/4 of his net worth, how much would this person have paid in premiums? Frank's analysis led me to believe it would be at least 1/1.63 of this amount, or 46% of his net worth, which seems a high price to pay!

Kirby said...

Hi Patrick, this is Jason Kirby at Maclean's magazine. I'm leaving a comment on your blog because I couldn't find a way to reach you by email. I'm working on a story looking at the rent-vs-buy debate and would like to chat with you about your decision to rent, and what went into it. If you're interested, could you shoot me an email today with a number I can call you at.

Patrick said...

@Kirby: I couldn't figure out your email address either, so I've put my email address in my Blogger profile now. Give me a shout.

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Patrick said...

@Sandy: Thanks for the offer, but I'm not hosting guest articles here. This blog is just what it says it is: my random thoughts on personal finance. I don't make any money from it and don't really intend to.

Canadian Investor said...

I completely agree. Rarely will having the money replace what was lost. I'm a firm believer in that insurance products are for those who can't afford to take a large financial loss, it definitely should not be a sort of gambling in hopes that it will pay off.