Weddings are expensive – but divorces can truly break the bank.
Yes, legal fees can be a significant factor, especially in a contested divorce with heated disputes and complex or high-value assets. In general, the less you can agree on, the more you have to litigate, the longer it takes, and the more the costs mount.
But the real sticker shock is the impact of divorce on your life and finances afterward: divided assets; the higher cost of maintaining two separate households and no longer splitting the bills; spousal and child support obligations; loss of health insurance; tax implications (forced liquidation of assets, single vs. married filing status); erosion of future wealth through division of retirement plans…
Studies show that divorced people’s standard of living drops precipitously from what they enjoyed while married – and that the impact is markedly worse for women (40-45% reduction) than men (25%). In 2006, an Ohio State University study of 9000 people nationwide found “divorce reduces a person’s wealth by about three-quarters (77 percent) compared to that of a single person.” A 2022 report found that women’s likelihood of entering poverty more than doubled in the first year following divorce. In some cases, a split is economically devastating for years to come.
Sixteen years ago, one North Carolina-based company tried to address these risks by introducing “divorce insurance.”
The aptly (or perhaps ironically) named WedLock insurance product launched in 2010, but quickly collapsed – for a variety of reasons.
The policy offered flexible “units” of coverage at $16/month, each providing $1,250 in coverage, with an additional $250 per unit added for every year the policy was maintained. There was a four-year waiting period before it would kick in upon divorce. Then, if your marriage ended, you just submitted your divorce paperwork and received a lump-sum payout.
Why didn’t it work?
Well, the corporate details are a bit hard to pin down, but first and foremost, it appears there were underwriting issues (a breach of contract, a backer walked away). Plus, the policy itself was an “excess & surplus” insurance line that lacked state guaranty, meaning there was a lot of risk for the consumer, and that made it unappealing to purchase.
But there were also some seemingly baked-in, conceptual reasons for its failure.
First of all, it wasn’t that great of a financial deal. Critics pointed out that a policyholder who bought 10 units would spend $4000 over two years and still have only $12,500 in coverage. Although you could add a rider that reduced the waiting period to three years, or another that allowed a return of your premium if you split before the waiting period was up, those who stayed married would see no return on their investment at all.
Further, if you bought the policy during the marriage, upon divorce, it could be categorized by the court as marital property, and any payout would be subject to division with your shared assets.
The plan was also criticized for its overly simplistic flat-premium structure that, according to a report by Carlos Vidal-Melia, University of Valencia, failed to make standard “actuarial adjustments for key risk factors such as age, marital duration, and income disparities” and also lacked attractive “insurance features, such as risk-based pricing and non-claim incentives.”
On the one hand, the plan depended on people buying it because they were concerned about their risk of divorce. At the same time, “This pricing model increased the likelihood of adverse selection, as higher-risk couples could obtain coverage at the same cost as stable marriages,” says Vidal-Melia. In other words, the more likely a couple was to divorce, the more likely they were to purchase the policy, resulting in more payouts.
There was also the problem that it actually incentivized divorce. According to an Insurance Journal article at the time, experts pointed out that, whereas typical insurance policies are designed to protect against the unexpected, “Divorce is a choice, which means there is a moral hazard…the temptation some might have to divorce early to capitalize on the policy.”
Ok, so divorce insurance, at least so far, is a non-starter.
But the good news is that there is a way to protect yourself from some of the financial hazards of divorce, and more and more soon-to-wed couples – average couples, not just the rich and famous – are discovering its practicality and wisdom: the prenuptial agreement.
What is a prenuptial agreement or “prenup”?
A prenup is a legal contract, signed by both spouses-to-be, which outlines how assets and debts will be divided in the event of a divorce. It’s designed to protect each partner’s financial interests before marriage and to simplify the dissolution process if the marriage ends.
Remember that California is a community property state, meaning that with few exceptions, all assets acquired during a marriage are considered equally owned and will be split 50/50 in divorce. But a prenup allows you to make tailored financial arrangements.
For it to be enforceable, both partners must enter into the prenuptial agreement willingly. It must comply with the Uniform Premarital Agreement Act, under the California Family Code, which establishes standards of accuracy, fairness, and integrity.
In California, the typical prenup will:
- Outline the division of marital assets, debts, and future earnings in the event of a divorce
- Establish separate vs. shared property
- Set terms for spousal support
- Address estate planning – establish guidelines for wills, trusts, insurance beneficiaries, etc.
A prenup succeeds where Divorce Insurance failed for numerous reasons.
It removes the “moral hazard.” A prenup doesn’t pay out because you divorce – it simply determines how your existing assets will be divided if you do. A prenup also doesn’t assume you will divorce, nor incentivize you to do so. It’s just a tool, a roadmap that helps streamline the dissolution process IF the marriage doesn’t last – making it much less complicated and contentious, and giving you far greater control of the financial ramifications of the split.
It’s custom-made. Unlike Wedlock’s generic, one-size-fits-all financial structure – limited coverage and a flat payout if you divorce – a prenup is tailored to the couple’s specific needs, goals, and economic circumstances. It addresses their actual assets, debts, business interests, and long-term financial plans.
It’s just the two of you. With a prenup, there’s no third party. Where a divorce insurance company (at least in theory) profited from uncertainty – from people predicting divorce – a prenup is just between spouses. With a prenup, no corporation relies on your fears to make money, nor does a company need to remain solvent for your agreement to remain valid. Your prenup doesn’t need a backer – other than the court.
It’s regulated and legally binding. One of the problems with Wedlock was that the product was new and the model inherently risky. Prenuptial agreements, by contrast, are well established and subject to strict rules.
A prenup protects both spouses. There’s no policyholder in a prenup. You craft it together with your attorneys, and it must meet legal standards of fairness.
There’s no waiting period. Your prenup is active and enforceable when: you both agree and sign (after a 7-day review), the court approves it, and you get married.
By providing clarity, prenups help avoid conflict and uncertainty and build stronger partnerships. Although the topic can be difficult to broach at first, approaching the prenup process with openness, honesty, transparency, and sensitivity can help build a robust, trusting marriage. It facilitates constructive conversations, helping you work together through potential conflicts, set goals, and align your values.
Through a well-crafted prenup, a couple can address and offset many of the very factors that make the end of a marriage so complex, contentious, and financially shocking. The family law specialists at SFLG are here to help.
by Debra Schoenberg
