Wells Fargo Advisors LGBT Insight: Insurance Strategies for Married, Same-Gender Couples

David Helverson, Vice President Investment Officer, who holds the Accredited Domestic Partnership Advisor Designation, with Wells Fargo Advisors, LLC in Chicago, seeks to address the unique financial challenges faced by domestic partners. You can reach David at david.helverson@wfadvisors.com and https://home.wellsfargoadvisors.com/david.a.helverson1.


Prior to the Supreme Court’s ruling in United States v. Windsor that the federal Defense of Marriage Act was unconstitutional, many same-gender couples employed financial strategies and estate plans to address higher tax rates and lower exemption levels. Life insurance was often used as a means to replace pension income or provide additional funds or liquidity to pay estate taxes at the insured’s death. With more retirement and tax benefits available to same-gender couples today, the original need for these contracts may no longer be as important or even present. However, before couples abandon their life insurance as obsolete, closer consideration may reveal new or different needs and benefits of life insurance in a same-gender couple’s overall financial plan.

Basics About Life Insurance

Generally speaking, term life insurance is pure insurance without any cash value or investment account attached to it. It is typically chosen to create an estate or a larger estate where a small or inadequate amount of net worth currently exists. It is usually the least expensive insurance option and when it is no longer needed, the policyholder usually discontinues the policy. A drawback to term insurance is that premiums increase over time and the policy may be cancelled if the insured becomes uninsurable due to a medical condition and the policy has reached its specified term period and requires insurability for the next term. Permanent life policies generally cannot be cancelled and the premium, while more expensive initially, typically remains the same over the years and a portion of the premium is directed toward a savings or investment account.

Other Options

For couples who now qualify for pension benefits as a surviving spouse, life insurance purchased to provide extra retirement income to a surviving spouse may no longer be necessary. They may, however, consider exchanging the current life insurance policies for a tax-deferred annuity or long-term-care insurance through a 1035 exchange. Such an exchange may provide a more flexible, effective or optimal retirement vehicle while continuing to defer tax on the policy’s gains. It is important that the customer realize the possible tax implications of doing an exchange and whether retirement income or long-term-care funds can be obtained from the present policy.

IRS recognition of same-gender marriage has effectively (with proper planning) doubled the estate-tax exemption for legally married, same-gender couples from $5.34 million to $10.68 million. Couples that once employed life insurance to pay for estate taxes may no longer need as much coverage. To avoid including insurance proceeds in the deceased’s estate, many of these policies were owned by third parties or in the form of an Irrevocable Life Insurance Trust (ILIT). With the higher exemption limit available through the Unified Credit and Marital Deduction to legally married same-gender couples, the additional costs of establishing and administering an ILIT may no longer be necessary. If a policy is already held in an ILIT, this may limit the options to either continuing or terminating the policy. The couple may not wish to terminate the trust as estate-tax laws and limits are sometimes subject to dramatic change. An ILIT may be terminated based on the provisions in the trust, but there may be adverse penalties and tax consequences in doing so.*

It almost goes without saying that each couple’s needs, objectives and plans may vary considerably and there is no one plan or strategy that applies to all. Therefore, couples should consult with their own financial advisor and/or insurance professional to thoroughly review all of their options.

*Liberman, Gail, Should you end your irrevocable life insurance trust, Palm Beach Daily News, Palm Beach, FL, June 23, 2013, The Shiny Sheet, online edition

Wells Fargo Advisors is not a tax or legal advisor. You should consult with your tax advisor or attorney concerning your particular situation. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state. Investment products and services are offered through Wells Fargo Advisors, LLC, member SIPC. Wells Fargo is No. 17 in the DiversityInc Top 50.

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