August 02, 2007

posted by Dave Hoffman

Catastrophic? Heck! Divorce was the best thing that ever happened to me! (In particular, it probably reduced my risk of suicide.)

That said, insurance would have made the last few years a lot more financially secure for me and my daughter.

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David hits a lot of points on this subject and I’ll try to address the key issues.

>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.

The fact is whether you know it or not divorce impacts the financial position of us all. Failed marriages account for $68 billion in lost productivity to businesses and cost US tax payers over $30 billion annually.

He’s also right on target with the fact that women are hit the hardest. As Harvard law professor Elizabeth Warren and Amelia Tyagi note in their book, The Two-Income Trap: Why Middle-Class Mothers & Fathers Are Going Broke (Basic Books, 2004), a sad fact is that in the past 30 years the number of newly divorced single mothers filing for bankruptcy has increased more than 700 percent. And they found that this has nothing to do with child support.

According to Tyagi “The problem is that too many two-income married couples are already in trouble financially, and if they're not making it, then the single mom doesn't have a prayer.”

In times past when a family got divorced, the previously stay-at-home mother went back into the workforce and brought in a new income. In addition, 30 years ago families were much more likely to have a mortgage they could easily afford, some money in the bank and no credit card debt. Divorce was still a big financial shock back then, but as individuals, single parents in the 70’s often had more resources available to cope with it. Today there's often no way to bring in new income, since both parents are already working. Plus, the average family today owes $8,000 or more in credit card debt, and its fixed expenses are already claiming the overwhelming majority of two incomes. The average family today simply doesn’t have any financial breathing space to deal with the new situation. Add on the legal costs and the costs of setting up a second household and it becomes a recipe for disaster.

Worldwide, divorce has now become the number one contributing factor to bankruptcy and poverty among (newly) single mothers. If we can keep even just one child out of a life of poverty by providing this benefit, all the monetary gain by anyone will pale in comparison.

>But unlike almost all other catastrophic risks that we face, the risks 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), traditionally the risks (physical and mental health, financial, legal) of divorce can not be spread and hedged. Such is the law.

It can be argued that in many cases divorce may unmistakably be a “fortuitous event” to one spouse, who thereby does face a real and tangible risk of loss. In fact many states will consider the same dilemma they faced when pre-paid legal services were first introduced and we already know that in some states we’ll be treated as insurance (rather than an investment) under the letter of the law simply because of the language of the contract.

>I'm interested in this topic, and so I was quite intrigued to read about a new product being developed by an entrepreneur named John Logan, of the SafeGuard Guaranty Corporation: divorce insurance.

Yipes! Much like Life Insurers never use the term “Death Insurance”, we much prefer the term Marriage Insurance. In fact, unlike Life Insurers who don’t reward anyone who lives past the term of their coverage, SafeGuard provides a much richer benefit to those who do successfully complete the term of our contract, meaning, still have a successful marriage after 25 years.

>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.

Unfortunately, the source here is inaccurate. The text that Professor Hoffman referenced above is from a patent application filed in 2003 (that has no connection to SafeGuard Guaranty Corporation) that was rejected last year.

David did get the description of the product nearly on point, however, as I mentioned earlier, we know in some states we will be regulated under the auspices of the departments of insurance so in fact we’ll follow the same guidelines as any insurance company in those states.

And we’re definitely NOT an annuity since the differences are substantial, but few people understand what a “Face Amount Certificate” is which is a closer description from an investment perspective.

>So what to think? Well, first, this is simply not divorce insurance.

Aside from the fact we dislike that term altogether and the negative connotation it portrays, David is right to some degree. SafeGuard’s offering will be marketed as a hybrid investment vehicle for married (or soon to be married) individuals to create wealth that just so happens to have a by-product of a financial safety net (in the form of insurance protection) in the event the holder becomes an unfortunate statistic of divorce.

>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.

We agree with the idea that thinking about divorce right before (or after) you’re married has a MAJOR “yuck factor” which is why we want people to invest in the SUCCESS of their marriage and we’ll gladly make them wealthier if they follow through on their wedding vows of “’til death do us part”…well before the “death” part. But the fact remains that in today’s world divorce is a real and tangible risk for anyone who marries, so hopefully, we’ll take the place of many pre-nupts which tend to be one-sided anyway.

And those of us that have been through the nightmare of divorce would never wish it on our kids, but the sad reality is that children of divorced families are three times more likely to divorce than their counterparts from successful marriages. We know many parents that will happily purchase these policies for their kids in hopes that the end result is handing them a big check on their 25th wedding anniversary and not subsidizing a new start.

>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.

Since the “risk pool” is not simply made up of premiums paid by others, there is no subsidization, especially “forced” but we understand the assumption. Unfortunately, since no actuarial experience tables on the success or failure of marriage exist today, we’ve got to start somewhere, so we’ll stick with a guaranteed issue. And truth be told, with today’s data the result would likely be counter-intuitive with first time marrieds being charged the highest rates somewhat akin to young automobile drivers.

Regarding the potential of a pre-paid legal aspect, although legal fees are generally a large portion of the overall costs of divorce, as an example, the costs of setting up a second household can be just as much if not more, and in many cases, those types of costs can’t be paid over time like legal fees. And certainly, if both were available, we’d recommend getting both. Since our benefits come in the form of cash that can be used for any purpose, one does not cancel out the other like coordinating benefits of multiple life insurance policies.

Lastly, as David mentioned, we are hopefully on the tail end of funding but there’s still room for investment, so I’m happy to speak to interested parties. The easiest way to reach me is through our website. www.safeguardguaranty.com.

John A Logan, CEO, SafeGuard Guaranty Corporation

John,

This is a clarifying and helpful comment. Thanks for stopping by!