A professor at the University of Illinois at Chicago says it would be feasible for insurance companies to offer divorce insurance.
J. Christopher Westland, a professor of information and decision sciences, says he began sketching out the actuarial tables for such insurance as an exercise, prompted initially by watching a friend go through a messy divorce and its financial consequences. After a little work, he says he found the idea is possible.
He says such tables would not have been possible before the 2000 U.S. Census. But in 2000 the census asked the detailed questions that allow one to compute a person’s risk of divorce. Research at the National Marriage Project at the University of Virginia has also helped to quantify the risk.
“It’s basically a workable business,” Westland says.
About two million Americans get married every year, and the chance that their marriage will not last is a toss up. According to the census data and other research, couples have a 20 percent chance of getting divorced within the first five years of marriage. They have a 30 percent chance of divorcing within 10 years. Overall, it is said that half of American marriages end in divorce.
The process can take years sometimes. During that time, the joint assets often are tied up. But, suddenly, there are two households to support and attorney fees to be paid. Moreover, financial pressures raise stress levels. They are already an issue in many marriages that come apart.
The insurance Westland envisions would cover those divorce costs, not the settlement or the living costs afterward. The average policy would have a $2,500 annual premium for coverage worth $200,000. But, of course, people could vary their level of coverage, he says.
From the census data, Westland identified several risk factors associated with divorce including age (younger is riskier); race (Asian is the lowest risk); whether a woman had forced premarital sex (a woman who has been raped has about a 50 percent higher risk of divorcing in the first five years of marriage), and income and education (those with more have less risk).
Some other factors that research has identified as conferring higher risk are the wife’s working and living in an urban environment. A wife with a high level of education is associated with a lower probability of divorce early in a marriage, but a higher probability later.
Westland freely admits there are problems with his product idea. For one, not all the risk factors could be used in rating. Also, the main problem is that divorce is not a fortuitous event. Divorce is a choice, which means there is a moral hazard.
But, he says that the moral hazard, and the temptation some might have to divorce early to capitalize on the policy, can be dealt with by creating a blackout period.
But, David Hoffman, a law professor at Temple University and an expert in contract law, who has written about divorce insurance, says he is not sure there is any way around the moral hazard and that is the idea’s undoing.
No insurance company is likely to touch it, he says. In some states, it may not be legal to offer insurance with a moral hazard.
“Given the moral hazard, I just don’t see it as an insurance product,” he says.
Betrothed couples might not be very interested in it either, he said. If most divorces occur within 10 years of the wedding, and 50 percent of marriages end in divorce, a company that offers such insurance is going to have to charge a premium that will come pretty close to covering the policy amount. That means it is likely to be expensive, and, if it is working just like a savings account, couples will want a better investment vehicle for their money.
John Logan, a North Carolina-based entrepreneur, however, says he will soon begin offering a divorce coverage product that gets around the problem of moral hazard.
Logan’s company, Safeguard Guaranty Corp., intends to offer coverage whereby if a couple gets divorced and files a claim, they will collect an amount based on the amount of premiums paid. But, the payout will be much less than they can collect if they stay married and do not divorce for 25 years, at which time there would be a big payout with a return.
Some have contended that Logan’s planned product is more of an investment vehicle than true insurance. But, he says it is insurance–insurance against the potential for financial loss as a result of divorce proceedings. He says that makes it a legal product, because no one can predict the potential for financial loss.
Logan has checked with a number of state departments of insurance, and only three have had any objections to the product.
Logan says he cannot at this time be specific about the amounts and the amount of return. But he says it will be something like this: If a couple buys a $100,000 policy, and then divorces after five years, they will collect $12,500; if they divorce after 24 years, they collect $64,500. But, if they stay married for 25 years, they collect the full $100,000.
“We will blow the doors off of other investments, that much I am sure,” he says.
Logan’s proposed product, which he intends to launch next year, though he has been saying that for a few years, would offer different levels of coverage, ranging from $20,000 to $2 million. He expects that for $20,000 worth of coverage the premium would be about $360 a year.
Both Westland and Logan say their idea is not so outlandish or distasteful. After all, prenuptial agreements are extremely popular. This is no different in their eyes.
Logan points to a number of statistics showing the need for such insurance. Those include:
The average family has about $8,000 in credit card debt, which means the average divorcing family has $8,000 in credit card debt, and they suddenly have to set up a second household.
An Ohio State study showed that the average person who divorces loses 77 percent of their net worth.
And, finally, the divorce rate currently is about 50 percent of marriages and research suggests that those who come from divorced backgrounds are three times more likely to divorce themselves. The divorce rate, therefore, appears more likely to go up than to go down.
“Better tools for managing divorce are both possible, and increasingly attractive to individuals and society,” Westland says.