Filed Under:Agent Broker, E&S/Specialty Business

Making Divorce Pay Through Insurance

The road to marriage is full of rewards and fraught with perils, a fact made quite clear in those traditional vows: for better, for worse; for richer, for poorer; in sickness and in health.

With divorce rates as high as 50 percent in the United States, is divorce insurance the answer to mitigating these risks?

According to John Logan, chairman and chief executive officer of Safeguard Guaranty in Kernersville, N.C.--and a handful of policyholders who have already signed on--the answer is yes.

Driven in part by his own marital breakdown, which he refers to playfully as the "War of the Logans," Mr. Logan launched WedLock Divorce Insurance in August 2010.

"If necessity is the mother of invention, I'm the poster child for this product," he said.

Mr. Logan said that while his divorce proceedings with his now ex-wife began amicably 10 years ago, with them even crafting a separation agreement together at the kitchen table, things took a turn for the worse when lawyers got involved.

That's when inspiration struck.

"When the dust settled, I was broke and about to lose my home," he said. "I thought, 'I can't be the only person that this has happened to.'"

HOW IT WORKS

The concept behind divorce insurance is fairly simple. The insurance is sold directly to consumers online in units, with each unit costing $15.99 per month in exchange for providing $1,250 of coverage. Policyholders can buy anywhere from one to 200 units, or up to $250,000 in initial coverage.

Every year that the policyholder continues to renew beyond the 48-month waiting period, the policy increases in value by $250 per unit.

"For example, if someone bought a 10-unit policy, they would pay premiums of $159.90 a month and have initial coverage of $12,500," explained Mr. Logan. "Beginning on day one of year six, this policyholder would add coverage of $2,500 each year. By the end of 20 years, that $12,500 would now be worth more than $60,000."

The gambits are obvious. If a marriage is already going south, couldn't a couple buy the insurance and cash in as a parting gift? As it turns out, the claims process isn't that simple.

"In order to protect ourselves against adverse selection, we have a very lengthy waiting period," Mr. Logan said. "This is not for people in the process of getting a divorce right now or even in the near future."

What exactly constitutes "lengthy?"

Policyholders must have an active policy for 48 consecutive months under WedLock's standard plan before they are eligible to make a claim. There is an option to reduce the time to 36 months by purchasing a rider, but "it almost doubles the cost of the policy because it increases our risk factor significantly," said Mr. Logan.

Taking the above policy example into consideration (10 units at $159.90 a month), a person with a standard policy who decided to get divorced after year four would end up paying $7,680 in premiums for a claim payout out $12,500. Is it worth it?

"I think divorce insurance is a good concept, but you're presuming you're going to get divorced," said Timothy A. Hickey, a divorce attorney with Hickey & Liebman. "We know that 50 percent of marriages end in divorce, but for the other 50 percent it's potentially a waste of money."

"However, for those who use it, [divorce insurance] would seem to be a good deal because a lot of people today want to get divorced but don't have the money to do so for lack of a job or the poor economy," continued Mr. Hickey. "It would seem especially worthwhile for people who cannot come up with lump sums of money to pay for things like an attorney's retainer fees. But the problem I see with this insurance is that a claim isn't paid out until the divorce is finalized."

It's a fair point because a divorce insurance claim can only be filed after it has been finalized by the court. That means funds would not be available to pay an attorney's retainer fees, which can run between $3,000 and $10,000. This fact hasn't escaped Mr. Logan's attention, though.

"If a policyholder had a Legal Separation Agreement rider, they would receive half of the benefit when they legally separated (prior to the divorce)," he said. "That could provide enough cash to pay the attorney up front, but it would depend on the size of the policy."

WHO'S BUYING?

So far, the response to divorce insurance has been encouraging to Mr. Logan. "We have a handful of policies sold, and we haven't done any advertising yet. We are now aiming at putting together the network of agents who will be selling it beyond the direct-to-consumer approach online."

Based upon the buyers so far, a demographic sketch of buyers has emerged.

"One hundred percent of people who have bought the policy thus far are already married," said Mr. Logan. "The policy values are higher than we anticipated. We expected average premiums around $150, but it's closer to $250 a month. The largest policy is well over $1,000 a month. There has been an interesting range of units being purchased."

Market research showed that those who are already married weren't the only parties that were interested in the coverage.

"The reality is that these policies don't kick in until four years after they are bought," he said. "So, for instance, couples who might be on a two-year waiting list for a reception hall could still buy policies while they are engaged and still be eligible to make a claim."

Apparently, there's even a market for overprotective mothers and fathers.

"Parents could potentially buy divorce insurance for their children--even without their kids knowing about it," said Mr. Logan. "So if a father is worried about his daughter's decision in a partner, he could purchase a policy. If it doesn't work out, he can say to her, 'I'm sorry this happened; here's a check to restart your life because I already turned your bedroom into my den.' However, we don't advocate people buying policies and hiding it from their spouses or other family members."

Given the conservative nature of the insurance industry, Mr. Logan doesn't expect any competition in this line of business until claims start being made and he proves beyond a shadow of doubt that the model works. He also plans to launch other products in 2011, including a "successful marriage benefit" that provides incentive to couples who stay together for 25 years.

While Safeguard Guaranty developed the concept and continues to market the product, Wedlock Divorce Insurance policies are currently written by Prime Insurance, a Chicago and Salt Lake City, Utah-based excess and surplus lines insurer rated "B-plus" by A.M. Best.

Eric Gilkey is an editor for Summit Business Media, which owns National Underwriter. He is editor of Summit's new insurance news and information mega-site, PropertyCasualty360.com--a website that brings together content from all of Summit's property and casualty insurance news services. Mr. Gilkey can be reached at EGilkey@sbmedia.com.

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