Is Divorce Insurance a Good Idea?

Posted By Pasadena Family Law Attorney || 11-Oct-2010

Much has been written about divorce insurance, since the August 5, 2010 launch of WedLockDivorceInsurance.com. This is the first time that insurance of this type has ever been available. “The product is sold as individual policies. You buy it in units of coverage. Each unit is valued at $1250 at a cost of $15.99 per unit. For instance, if you bought 10 units of Divorce Insurance; it would cost you $159 a month.... Policy holders can buy up to 200 units of divorce insurance which is $250,000 in coverage.” “Then, if you get divorced and your policy has matured (see below for the maturation rules), you would send WedLock proof of your divorce. In return, you’d receive a lump sum of cash equivalent to the amount of coverage you had purchased.”

"So how does the company prevent people who know they are going to get a divorce from signing up? To prevent that kind of adverse selection, the policies don’t mature until 48 months after their effective date (though people can purchase additional riders to reduce that maturity period to 36 months and to get their premiums back if they happen to divorce before the policy matures)." "That will hike your monthly premium to $30 per unit.

Unless you purchase the additional riders and your marriage ends less than 48 months after you purchase the policy, you lose whatever premiums you paid for the insurance. At $30 per month, the return on the "investment" if the marriage ends within 48 months of obtaining the insurance policy is relatively low. Therefore, it makes little sense to purchase such riders. However, without such riders, if you divorce before the waiting period is over, the premiums are lost. For a standard policy, "if a policyholder who bought 10 units got divorced after 10 years, he or she would have handed over $19,188 and would receive a payout of $27,500.” If the math does not add up, that is because “after the required 4 year waiting period is over, the policy goes up in value every year by $250.00 per unit." However, bear in mind that policy holders who never divorce, lose whatever premiums they paid for the insurance.

All in all, the insurance does not seem very cost effective. "It seems that people would be better served by self-insuring, i.e. putting $15.99 per month into a savings account and earning interest, rather than paying for such coverage and then possibly never getting divorced. Plus, some divorces are relatively amicable and may not cost tens of thousands of dollars. In response to this notion, Mr. Logan (the CEO and Founder of Wedlock Divorce Insurance) said that while people could end up with more money that way, there’s always the chance that money would be squandered by a soon-to-be ex spouse. 'There is nothing to stop your spouse from raiding those investments and taking it all.... And then with all the money gone, you’re left with all the legal bills,' said Mr. Logan, who said the idea for the product came from his own experience with a financially painful divorce." "He also argues that the $250 per-year appreciation per unit is much more than the miniscule returns available today on savings accounts.... In addition, the company’s Web site makes the argument that most people don’t have the discipline to save consistently.

If a person has the discipline to make a monthly premium payment for such insurance, I would hope that they would also have the discipline to place those funds into a savings account. It may be that the return on such an investment is miniscule, but at least the investor is guaranteed a return on their "investment." Furthermore, if a person is not bothered paying for such insurance, what would prevent that same person from placing those monies into an account which is not accessible to their spouse? Any concern that a spouse would “raid those investments” is therefore easily addressed and at no cost.

"Depending on whose statistics you use, somewhere between 40 to 50 percent of first marriages ultimately end in divorce. (Click here for a breakdown of divorce statistics.)” Therefore, between 50 to 60 percent of those who purchase divorce insurance will never see a return of any sort on their investment. In fact, they will have “lost” all the monies they paid in premiums for the insurance. For those who do receive a payout because their marriage failed, the payout is insufficient based upon the odds. Also, please take note that “the policies aren't backed by any state insurance or other government fund, only by Prime Insurance, Safeguard's underwriters."

Of even greater concern to me is the fact that the premium is being paid throughout the course of the marriage. This is not comparable to a premarital agreement, which is something a couple enters into before marriage. In fact, many couples will not marry without a premarital agreement. There are many valid reasons for entering into such an agreement, but those reasons are not true for divorce insurance. I understand that a large percentage of marriages end in divorce. However, I would strongly suggest that someone re-evaluate entering into or remaining married to someone who would be inclined to purchase divorce insurance and pay the premiums while happily married. There is also the potential for fraud, in that couples in need of the money may divorce just to obtain the insurance payout and still remain a couple and possible remarry. "You'll have to celebrate at least your fourth anniversary with your sweetie in order to cash in, because that's when the policies mature." I do not believe that a four year waiting period is something that will discourage insurance fraud by divorcing in order to recapture monies thrown away in unnecessary insurance premiums.

What Mr. Logan also fails to explain is that the payout from the divorce insurance is taxable to the extent it exceeds the total amount of premiums paid for the policy. He also neglected to explain that if the premium is paid with community property money, the payout from the divorce insurance would be deemed community property. Moreover, if the payout is not deemed community property, it would be viewed as income for purposes of calculating child support, spousal support and attorneys fees contributions. As if that were not bad enough, I suspect that people would spend even more money litigating their divorces and destroying their families, knowing that they will be "reimbursed" for such expenses through their divorce insurance.

It seems to me that Mr. Logan has figured out a way in which to recoup the financial losses he suffered as a result of his divorce. While Mr. Logan may benefit financially from divorce insurance, that is only because he owns the company. I am not sure that the policy holders stand to benefit from carrying such insurance.