WedLock is a new type of casualty insurance that gives the unhappily married policyholder a payout after he or she is divorced. It costs about $16 a month for every $1,250 of coverage. John Logan, founder of the company, figured there must be a market for those who want to hedge their marital bets. But to discourage people from signing up just prior to their divorce, policyholders must apply four years before the policy will pay out. It adds a premium of $250 per unit for every year the marriage survives beyond four.

Questions:

1.  Assume that a policyholder bought $12,500 worth of coverage and divorced after 10 years.  What would be the expense of the policy?  Show your work.

2.  Assume the same facts as in # 1.  What would be the payout of the policy? Show your work.

3.  Assume that a couple who owned a small sole proprietorship company.  After a year of successful operations, they married and bought this insurance.  Their company paid the premiums.  After buying a $20,000 policy, they divorced after 7 years.  What would be the expense to the company?  What would be the payout and how should the company record this? Give the journal entries and show your work.

Source:

Luscombe, B. (2010).Divorce Insurance: Get Unhitched, Get a Pay-Out, Time, September 19  (Retrievable at http://www.time.com/time/magazine/article/0,9171,2015772,00.html?hpt=C2)