A retired hedge fund manager sent me this 7-minute pitch (plus questions) for divorce insurance.
At 1:26:
- half of marriages fail, most within the first 8 years (one third of people will reach a 25th anniversary)
- Divorce reduces the average person’s wealth by 77% (why not only 50%? see “Litigation, Alimony, and Child Support in the U.S. Economy” for transaction costs and how people change their behavior in response to family law)
- Taxpayers end up on the hook for $112 billion (Parent A sues Parent B and prevails in winning custody, but due to choosing a non-wealthy sex partner, child support revenue does not increase total income enough to disqualify for subsidized housing, health care, food, smartphone, etc.)
At 3:08:
- Insurance policy will pay $10,000 to $2 million in the event of divorce (can rise with time)
I don’t see how this can work. “America, Home of the Transactional Marriage” (Atlantic) says that Americans tend to follow the money. Every U.S. state offers an inexpensive divorce procedure for parties who can agree on terms (in our survey of a Massachusetts courthouse, 17 percent of filings were “joint petitions”). What would stop two people from divorcing, splitting the insurance policy’s cash, and then getting back together? The Social Security system already provides a $128,000 cash bonus for people who divorce at 65 and remarry at 70 (see “Social Security and our world of no-fault divorce“). Why not spend $1,000 on an amicable divorce, pocket $128,000 from Social Security, pocket $2 million from this startup insurance company, and then remarry if it turns out that remarriage transaction is financially beneficial?
The Q&A session is interesting for what it reveals about America’s venture capitalists. None of them ask the above question, i.e., “If we live in a world of no-fault, no-social-consequence divorce, why wouldn’t a huge percentage of policyholders take the cash?” So the loss rate would go from the budgeted 50 percent to 90 percent, at which point the “insurance” ends up being simply a “savings account” with high fees and about 10 percent of customers who abandon their property.
Related:
As with so many of your hypothetical, the answer is “because that would be fraud”; insurance companies are not stupid and there is a non-zero chance you would be caught, sued, and possibly criminally charged. Hope that helps!
Anonymous: You mean caught like the investment bankers who made up prices for credit default swaps while their institutions were secretly insolvent?
And how is it fraud? How could the insurance companies prove that you got divorced just for the insurance in a court of law? The defendants could just say “sometimes mommies and daddies fall out of love.”
There is no way to perfectly hedge against divorce risk. Moving states still leaves you vulnerable to jurisdictional challenges. Asset protection has no viable benefit for people who don’t have $10 billion. Americans change their religion more often than their cell phone provider. Insurance is unworkable, otherwise Geico and AIG would already offer it.
Whoever “anonymous” is, I applaud their defense of the product but while every insurance company experiences some fraud, that’s not how we’d protect ourselves from adverse selection, meaning of course those that would try to profit by gaming the system. I’m assuming it’s from my presentation to the NAIC back in May of last year.
That being the case, what you missed on the slide you’re referencing is that the $10K to $2mil is for the successful marriage benefit that requires 25 years of inforce participation before that payment is made.
That said, the top divorce claim is still $1.2 million dollars. However, what you’re missing is that in order to be paid ANY divorce claim, the policy holder would have to be in the program for a minimum of 48 months, then, at that point, they’d receive the lowest amount. While the amount grows annually at that point based on the number of units purchased, from that point on we’ve already captured a minimum of 72-84% of our risk exposure (depending on nay riders purchased). In order for someone to receive the full $1.2 million divorce claim (the maximum allowable) they would have to purchase 200 units of coverage at $15/unit (or $3000 per month) and have paid into the program for 24 years.We’ll take that risk all day long because it would make far more sense at that point for them to stay married just one more year and get the $2 million Marriage Benefit.
I’ll be happy to explain the actuarial numbers behind the program to anyone who’s really interested, put suffice it to say that without knowing more about how the program works, you’ll guess wrong nearly 100% of the time.
We do want couples to collude to receive a payout, but they’ll make far more money by staying married if that’s their goal.
For those that want to see the presentation being discussed, here’s the link:
http://safeguardguaranty.com/NAIC_pitch_complete_w_questions_smartplayer.mp4
Sounds like overkill on top of the older ideas of prenups. What about insurance for the 45% who stick it out but want to slit each other’s throats for the next 50 years?
An insurance policy which allows women to pick men who would last longer but convey lower status & aren’t smooth talking enough in a bar might be useful. It would be lowballing insurance. It would be prorated, so the less status the man conveyed in a bar, the lower the premium was.
John: I wasn’t assuming you folks were stupid or had no plan, just sarcastically exploring why relying on the government boy scouts to save you was not a good one, even in the Sovereign District of New York. My main question would be how would the divorce loser actually capture the payout? How would he pay the premiums? Wouldn’t this just get thrown into community property?
Tony: You raise a good point that I hadn’t considered. Suppose that a judge wants to transfer 95 percent of the assets from defendant to plaintiff (maybe with some of the transfer happening over time, e.g., through alimony and/or child support). The divorce insurance payout just becomes an additional asset over which the family court has jurisdiction. So if the parent of the defendant purchased the policy hoping that it would provide a safety net, in fact the family court can guarantee that nearly all of the payout goes to the plaintiff.
Guys – again, because you don’t know all the details of the plan, you’ve guessed wrong. Just so you know, on average a person loses 77% of their net worth as a result of divorce, so 95% (while at the high end) is not uncommon. Family court can only appropriate assets that exist BEFORE the divorce is finalized. Even though they are life based policies, our Marriage Assurance policies are more like home or auto insurance in that regard, in that they have NO CASH VALUE until a claim is filed and a claim for a divorce payout can ONLY be filed AFTER the divorce is finalized. With regard to insurance payouts, legal precedent has already been set that an ex-spouse is not entitled to any portion of insurance paid on claims after the divorce when there is no cash value of the policy (like an auto insurance policy), regardless of whether or not they contributed to the payment of the policy with marital assets. The short version is the ex gets nada unless the policyholder chooses to use it to pay alimony or child support, etc. but that’s the claimant’s choice not that Family Court’s choice. I’ll wager we’ll have to fight that fight in court eventually, but as I mentioned, legal precedent is already on our side.
Note that these are individual policies in nature, not something jointly owned by husband and wife. Nor is the spouse even required to know one exists, hence the policy bought by a parent would never make it into discovery, if the parent kept it a secret, hoping for a surprise for the couple’s 25th anniversary.
John: I’m on your side, I hope this works. But based on what information is available to me, which is limited as you’ve repeatedly said, I’m skeptical until you win that fight in court with your product. Why would a judge voluntarily take something out of his jurisdiction? Appeals are generally useless in family court but maybe they could help here?
I think whether a plaintiff can get hold of the policy payout would depend on the state. For example, in http://www.realworlddivorce.com/Massachusetts we have a a lawyer saying “Massachusetts is unusual in that there is hardly any separate property.”
Certainly judges in the pro-litigation and pro-plaintiff states can and do look at what a defendant might be expected to receive in the future, e.g., from an inheritance or perhaps this insurance policy, when awarding money to a plaintiff. Their hands are not tied by the fact that something is technically an “individual policy.” Judges can award more than 100 percent of a defendant’s income to a plaintiff and 80 percent awards are fairly common here in Massachusetts (e.g., especially if a defendant has savings or family money that can be used for personal support). There are also modification actions. A defendant who has received or is receiving a payout from an insurance policy could be required to pay more in child support or alimony after a follow-on lawsuit.
(How is it possible for a court to take more than 100 percent of income? Sometimes it is because a defendant has married a new partner and the argument is that the defendant can live off the new partner while paying out 100 percent or more of income to a plaintiff. Sometimes it is because a defendant had a temporarily high income. This happens a lot in NY/NJ with Wall Street bonuses. One case here in Massachusetts that we know about, a local police officer was working some crazy overtime hours in the year that his wife sued him. So he was ordered to pay just over 100 percent of his base after-tax salary over to her. But the overtime opportunities had diminished and he was tasked with caring for children 4/14 nights (his plaintiff was able to get max child support plus max free babysitting on this schedule).)
I appreciate John attempting to do something in the private sector on this issue, and wish I could be a better red team. I have to admit that it is much more plausible than I previously thought. Perhaps the divorce insurance should be rolled out first in the most optimal states? Thanks to real world divorce we can see which states are bad enough for defendants that they’d want insurance but whose judges are still reasonable. Then some of the profits could be used to lobby for favorable regulations?
I can appreciate both of your positions. We do expect legal challenges eventually but our aim is that the bigger picture would include a husband and wife both having identical policies and a prenuptial agreement to keep more than just the disposition of our policies out of the hands of the family court. Incenting even a small portion of the general public to do that would save millions in taxes annually in every State. However, research tells us that there are far more people, already married, without a prenup in place, who may find some crack in the foundation of their “happily ever after” for whom a post-nuptial agreement is not a realistic option and who may then buy a policy for a potential parachute, which, in the event their marriage does NOT fail, will pay them a rich reward. The ideal situation would be for happily married couples to buy our “Marriage Assurance” policies (note that we don’t even like to suggest divorce) to guarantee themselves a huge windfall return on investment at the end of the 25 year term, but we know, regardless of their good intentions, some marriages will fail. When they do, we’ll provide a financial safety net to keep many families out of poverty (44% of women go below the poverty line for an extended period after divorce, many never recover financially) and if we can keep even one child from having to live any portion of life in poverty, I’m pretty sure you’ll both agreed that’s a good path to pursue.