Should You Buy Divorce Insurance?
posted by Dave Hoffman
Divorce is catastrophic: it increases the rates of suicide and heart disease; can decrease overall well-being for both parents and children; and it significantly hurts the financial position of the parties, especially women.
But unlike almost all other catastrophic risks that we face, the costs of divorce can not be fully insured. Because of statutory requirements that limit insurance coverage to “fortuitous events”, and the perception that divorce is elected (at least by one of the parties to the marriage), you can’t buy a policy that will pay you for breach of the marriage contract. Such is the law.
There has been significant enthusiasm for the concept. As some noted, you could imagine such insurance having a collateral-benefit: “risk matching” your perspective spouse (or even a first date) based on their premiums. But when you think about the concept a little bit, obvious objections present themselves:
- Fraud and Adverse Selection: Since divorce can be elected, how could an insurance company prevent gaming? Fake marriages seeking divorce payouts might soon abound: would the insurance company have to order Green Card from NetFlix to train its agents? For lack of a cheap way to assess the risk of divorce, and fraudulent marriage, premium rates overall would increase, leading “good” candidates (i.e., those who would never divorce) to opt out of the pool. This divorce insurance externality would be extremely difficult to manage. Indeed, this is why marriage insurance excludes reasons like “change of heart.” I don’t know that it is a soluble problem.
- Public Policy:
Imagine that we could solve the problem of intentional fraud, so the only payouts would go to innocent victims of adulterous spouses. We might still imagine that the common law, which generally prohibits insurance that encourages socially wrongful conduct, would strike such contracts on public policy grounds. The argument would go that the insurance regime, by decreasing the cost of divorce on the victim spouse, in effect increases the incentives for adultery, by reducing the ultimate financial and emotional obligations. In my view, this is a foolish argument, but courts seem to persist in treating insurance as a step-child of the freedom to contract movement.
The externality problem seemed so severe that I decided to go to the source, and emailed John Logan about his product. He was nice enough to chat with me for a few minutes, and I can now share the fruits of that conversation with you.
I started the conversation believing that Logan was offering a true insurance product. A business methods patent the company may have filed stated that divorce insurance is:
1. An insurance policy covering at least some financial consequences of the untimely ending of a contractual relationship between two or more natural persons, which contractual relationship governs the natural persons way of living together.
12. A method of doing business comprising: determining a periodic amount to be charged a prospective participant for divorce insurance; charging that periodic amount to a participant in an insurance program over a period of time; and administering the insurance program.
But when I talked to Logan, he preferred to call the product to be offered a “hybrid insurance/investment product.” The idea is that individuals would buy the right to a payout, in 25 years, of a fixed sum, and in turn promise to pay premiums priced based solely on the total face value of the instrument. The instrument – let’s call it an annuity for ease of reference – has a contingency: if its owner gets divorced, the annuity pays out immediately, at a rate to be calculated based on the time since purchase and the premium rate. That is, the longer you stay in the marriage, and the closer you are to the end of the 25-year annuity, the more money you will get paid on divorce. The product does not seem to intend to graduate premiums at all based on the risks of divorce, or the “why”. It is a fairly simple investment vehicle. The only other bell I learned about was their plan to permit individuals to recapture premiums at any time, so long as they purchase an initial premium rider, which is a bit of departure from ordinary insurance practice.
Because this isn’t an insurance product, Logan plans to market and run his business largely online, with little or no need for the ordinary back-end costs of an insurance business (actuaries, etc.) That said, he still needs an initial capital investment, and is still looking for additional investors before the product launches. He hopes to roll out “divorce insurance” this fall, if the financing lines up. He estimates a premium market approaching $200 billion annually, based on a base premium of something like $1,200 annually per policy.
So what to think? Well, first, this is simply not divorce insurance. That doesn’t mean it is a bad investment – I have no idea whether it is or not – but it does not intend to permit individuals to pay an actuarially measured share of the risks of divorce. I imagine that the legal and economic issues I’ve already discussed play a large role in the shaping of this product, but it still left me with some questions. There is obviously a degree of “yuck” factor when thinking about purchasing insurance for divorce – the kind of distaste than long discouraged pre-nups, and which makes proposals like these dead-letters. But this kind of financial vehicle would appeal to me more were I not “forced” to subsidize others’ divorces, and instead were measured at my own risk level. What’s the chance that courts will relax their public policy limitations on insurance anytime soon? Second, another way to approach the legal-fees aspect of this problem is through a prepaid legal service. I don’t know enough about these kinds of contracts, so this is a really ignorant question: how can such services possible get around conflict problems if they don’t counsel the entire couple about the ethical issues at the beginning of the lawyer-client relationship?