Happy with your current spouse but concerned that you may not make it to death do us part? It is not an unreasonable fear. According to government data, compiled by, of all agencies, the Centers for Disease Control, about one third of first marriages end in divorce before their tenth anniversary.
Don’t worry. To paraphrase Apple marketing, there’s a derivative for that. You can now buy divorce insurance. Pioneered by a new on-line outfit called WedLock, it is available in 46 states and the UK.
Here’s how it works. You pay monthly premiums for four years. If you get divorced after that, you get a check to help ease your pain and pay expenses. (Sadly, you cannot bet against the marriages of others.)
The four year waiting period is necessary, WedLock tells us, to avoid adverse selection. That makes sense. If you could just buy a policy the day the wife finds out about those “business” trips you’ve been taking, WedLock would go out of business pretty fast.
But having to pay four years of premiums before the insurance kicks in makes this a fairly expensive derivative. (Or as the hip trader types would say, it is “rich.”) The basic cost for one unit of coverage is $16/month for a potential payout of $1250.
That means that at the end of year four you would have paid in $768. If your divorce becomes final that day, which would be a sort of best case scenario for this deal, you will get 1.63 times what you put in, interest not included. So in order for this to be a good bet, you would have to have at least a 61% chance of getting divorced after your fourth anniversary. (768 / 1250 = 0.61)
Starting with year five, the benefit increases by $250 each year. That is a better deal than if the benefit stayed at $1250, but the ratio between what you pay and what you could get just keeps getting worse. By year ten the potential payout is $2750, but by then you will have paid in $1920. If you assume 3% interest, the value of all those premiums will be $2201.
At the other end, if you are so unfortunate as to get divorced during the first four years, you get nothing. Sorry. Unless of course you sign up for the “return of premium rider.” For only an additional $2.72 a month ($32.64 a year or $130.56 for the whole 4 years) this insures that if you get divorced prematurely you will get a refund on all you have paid in, without interest.
If you can’t wait four years, there is the “accelerated maturity date rider” which will shorten the waiting period to three years. It costs an additional $13.59 a month for 36 months. Under these terms, when the insurance takes effect you will have paid $1065 for $1250 of coverage.
By and large, this does not seem to be a very good deal for the typical married person. Which is not to say that I am particularly enthusiastic about WedLock’s prospects in my usual why-didn’t-I-think-of-this-first way.
As long as the four year waiting period is, I do not think it is long enough to prevent adverse selection. I imagine most divorcees had an inkling of some kind four years before the event. Just sign up for a policy the night you start taking off your wedding ring in bars.
Further, like any legal proceeding, a divorce naturally takes longer than may seem reasonable. But it could go a lot slower if one (or both) parties were deliberately attempting to run out the clock on an insurance policy. “Honey, let’s try more counseling. Or mediation. Maybe a trial separation. Whoops, I need to hire a new lawyer. Again.”
Another aspect I am not sure has been fully thought through is the selling of policies to individuals rather than to couples. I am sure that an individual is an easier sale. It is a purchase few would want to suggest to their spouses.
But what would be the impact of an individual’s divorce insurance policy on a divorce proceeding? Would you want the other side to find out that you had taken one out years before? Would concealing it be legal?
More to the point, imagine Hubby had been quietly paying premiums on 100 units, for a potential payout of $125,000. What makes us think that he will be able to keep the whole thing, rather than be forced to spilt it with soon-to-be ex-wife? Since this is a new product, I am pretty sure that the courts have not yet ruled on this point, which means it may be more than four years until we know if the payout from a divorce insurance policy is a martial marital asset or not.
Still, it is good to see the wheels of financial innovation turning.
[Photo – Jason Hutchens]