In the past, many same-sex couples didn’t pursue life insurance due to a multitude of limitations. But thanks to the 2013 Windsor and 2015 Obergefell decisions by the U.S. Supreme Court, more same-sex couples can take advantage of life insurance policies when coverage is needed based on their financial and estate planning needs. In fact, according to a recent study of the lesbian, gay, bisexual, and transgender (LGBT) community, approximately 42 percent of LGBT Americans now own a life insurance policy.1
For legally married same-sex couples, life insurance can be a simple way to provide a surviving spouse with funds to help make up for lost income after his or her spouse’s death. That money might be important, too, for paying for children’s educations or paying off a mortgage. And due to anti-discrimination laws, there should be no underwriting differences for LGBT individuals compared to heterosexuals.2
However, like many aspects of financial planning in today’s evolving LGBT environment, there are several elements of the life insurance discussion that warrant special attention for same-sex couples, whether legally married or not.
Group policy caveats
Some U.S. employers offer employees the opportunity to buy life insurance on their spouse through a group policy.3 This is good news for legally married couples — as long as the group policy is covered by the federal Employee Retirement Income Security Act (ERISA). Also, some employers extend group policies to domestic partnerships. Your employer’s Human Resources department should be able to give you details.
Federal estate tax exclusion and unlimited marital deduction
Due to the unlimited marital deduction, legally married same-sex couples can transfer an unlimited amount of assets between each other during their lifetime or upon death.
In addition, these couples now have access to a total of $11 million in combined federal estate tax exclusions ($5.49 million per spouse in 2017) if they wish to transfer assets either outright or in trust for children or other beneficiaries. Since most couples’ assets, including a life insurance policy death benefit, would be less than that threshold, federal estate taxes may not be a concern. You should check with your tax advisor about your situation.
The unlimited marital deduction benefits, however, are not available to civil unions or domestic partnerships, and state estate and gift tax rules may still be a consideration.
Same-sex couples without a legal marriage certificate may still be able to get life insurance with their partners as beneficiaries if they can demonstrate an “insurable interest.” In general, an insurable interest means that one person would be dealt a substantial financial blow if the other person dies.2 Insurable interest rules vary by state, but in many instances, if a couple owns a home together, that may be enough to prove insurable interest.
If the members of a same-sex couple are business partners, life insurance can be obtained as a business succession and continuity planning tool. In this instance, life insurance could be used for a buy-sell agreement or to simply provide the liquidity needed to continue the business when a key person has died
For example: If business partner A dies, and business partner B has a policy on the life of partner A, the policy gives cash to partner B to pay the heirs of partner A for A’s percentage of the business.
Life insurance trusts
For unmarried same-sex couples, there is also still the option used for years in estate planning for same-sex couples — creating an irrevocable life insurance trust. 2 The insurable interest rules still apply.
Not sure where to start?
There are many different kinds of life insurance, and the details can be complex, especially as marriage laws change. So be sure to speak with your tax and legal advisors, insurance professional, and financial advisor about your unique financial needs and challenges.
How much do you need?
Every situation is different when it comes to how much life insurance you should have — and policy purchases should be based on specific needs. However, for a general rule of thumb, some experts estimate amount of coverage at somewhere between five and 10 times your current annual salary though this should generally be considered a starting point since other factors need to be considered, as well. 3
Wells Fargo Advisors does not offer tax or legal advice. Insurance products are offered through affiliated agencies.
- The LGBT Financial Experience, 2016-2017 Prudential Research Study
- “New Strategies for Same-Sex Life Insurance: Same-sex couples tend to be younger, more affluent and buy low-cost term insurance,” by Alan Lavine
- “How Much Life Insurance Do You Really Need,” by Rob Berger, Forbes, Sept. 27, 2015