Divorce is often very costly to all parties involved. Recently, Safeguard Guaranty Corporation began offering divorce insurance that helps defray the financial hit imposed by a divorce. Divorce benefits are distributed as a lump sum to both former partners and are available after a mandatory 48-month waiting period.

a. Using a graph similar to Figure 16.1, show how the existence of divorce insurance may create a moral hazard problem.

b. How does Safeguard Guaranty deal with the problem of adverse selection? Explain.