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Life Quotes, Inc. 

·         Divorce insurance could be coming soon

·         Date posted: April 23rd, 2010 5:05 PM

·         By Karen Caffarini, Life Quotes, Inc.

Insurance policies help keep people on a sound financial footing when all sorts of catastrophes strike – floods, death of a spouse, even job loss. One insurance maverick wants to add another catastrophe to the list—divorce.

“Divorce creates a financial burden on both spouses and families, especially women, many of whom find themselves  falling below the poverty line,” says John Logan, chairman and CEO of SafeGuard Guaranty Corp. in Apex, N.C., who says he will have a divorce policy on the market within several months.

 The benefits from divorce insurance would cover anything involved in the divorce proceedings ranging from legal fees to starting a new household.

“All we do is write the check, we don’t tell them how to spend it,” says Logan.

Logan’s policy would be sold as a surplus line product, which means that these products generally insure risks not covered by standard lines of insurance.

Surplus line products are specialty insurances provided by insurance companies such as Lloyd’s of London and Chubb Group of Insurance Companies that will cover just about anything at a cost.

Logan’s product would be offered to anyone willing to pay for it, including those with several divorces under their belt, but there’s a catch.  The policy has a 48-month elimination period where the policyholder cannot file a claim, but would still be responsible for paying the premiums.

“It would work like a term policy in that it would pay once the divorce is finalized and only then,” explains Logan.

 Logan says divorce insurance also shares similarities with property and casualty policies.

 

“The available claim amount increases over time,” says Logan. “It automatically renews every year and each year it goes up $250 per unit of insurance.”

Logan notes that there would be no incentive to hold on to the policy if the benefit didn’t increase.

“They would eventually find themselves under water and would get back less than they paid in,” says Logan.

Logan has not released rates yet, but says the cost would vary from less than $1 a day for a base policy of $1,250 to more depending on how much insurance the policyholder would want to buy.  He adds that the product varies from $1,250 to $2 million in coverage.

Other insurance professionals and actuaries agree divorce is a catastrophic event and personal risk for the parties involved. Still, they wonder if Logan’s model will work, and if divorce insurance of any kind should even be offered.

“Insurance is meant to cover bad things that happen due to fortuitous events such as a fire, accident, etc. Divorce is not a fortuitous event; one or two parties are making that decision,” says Bob Wolf, an actuary for the Society of Actuaries (SOA).

Wolf says insurance works for two reasons: large numbers of clients and a proper pool of high and low risk clients. With a 52 percent divorce rate, the numbers are there. However, he says this insurance would attract those most prone to getting a divorce. “That’s where it would fail, actuarially speaking,” Wolf says.

Brian Ashe, past chairman of the Life and Health Insurance Foundation for Education, says there are questions surrounding Logan’s policy that should be raised: How can you be sure the policy is not misused by a couple in a financial pickle who will pretend to divorce just for the money; can you define the risks involved and can you design a policy that is responsive to those risks?

James Hunt, an actuary with Consumer Federation of America, was harsher. “It sounds actuarially unsound. It sounds totally improbable.”

 Logan is not worried about possible fraud, saying divorce is a very expensive process that no one flippantly contemplates. He says there is no risk of running out of money to pay claims.

 “Even if everyone got divorced on the same day, no one can make a claim in the first four years. That is a lot of revenue,” he says.

Insurance tips for divorcees

Ashe of the LIFE Foundation offers these five tips for the newly divorced.

1.       It’s more important than ever to make sure both parents have life insurance policies, with one or both including the children as beneficiaries. Ashe says the ex’s new spouse may not spend their life insurance money wisely, or name their own children or a new spouse should they remarry, as sole beneficiaries. This could mean your money would go to someone entirely different and leave your children out in the cold. If your children are young, he suggests putting money in a trust with a third party as trustee, until they become adults. This puts a trustee in charge of determining whom the money should go to and how that money should be allocated based on the wishes of their client.

2.       Have your spouse obtain term life insurance with you or your children as beneficiaries as part of the divorce settlement. Ashe says when a person dies, they no longer are responsible for child support payments. A term policy would provide money needed to fill that void. Ashe says the policy could be for five to 15 years, depending on the age of your children at the time of divorce, making it relatively inexpensive, especially if your spouse is healthy.

3.       If your divorce agreement does require life insurance benefits for you, check annually to make sure the premiums are being paid, the policy is still in force and you are still the beneficiary. Ashe says the insurance company should send a notice if the premium is about to lapse.

4.       Don’t forget group life insurance benefits through your employer. Ashe says people often forget to change their beneficiary on these policies after divorce, which means the children could end up being disinherited.

5.       Buy long-term care insurance. Because women usually live longer than men, more of them end up in nursing homes, which could cost $6,000 to $7,000 a month, Ashe says. This would ensure you don’t end up impoverished in your final years.

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