Life Insurance is boring and, when pitched in its many forms, confusing. While I don’t sell any insurance of any type, I counsel many of my clients on the right amount and types of insurance they need. The question that comes to mind for many same-sex couples who don’t have children is: Do we really need life insurance? The answer, of course, is “maybe.”
When a person or a couple has young kids, life insurance is usually necessary. For those of you who have young kids, it’s likely that you need it. If you have not consulted with a trusted insurance agent to determine how much insurance is necessary, please contact me. However, if you don’t have kids, you still may need insurance.
Does being gay or lesbian factor in?
In a direct sense, life insurance doesn’t discriminate. What’s relevant is whether or not a person has another person who relies on his or her income for survival, which many gay or lesbian people do. Additionally, being a same-sex couple starts to matter more when you estimate that your death will result in estate taxes, because you don’t have the ability to pass assets to your partner in the same way a heterosexual couple can (the unlimited marital deduction).
Assuming a person hasn’t already made significant “taxable gifts,” one’s net worth at death must exceed $5 million for this to be an issue for a gay couple. Where life insurance needs vastly differ between the LGBTQ+ and straight community, is with children. Since a large majority of the gay population fall into the category of dual-income-no-kids (DINK), the need for life insurance may be less compelling.
Do you need life insurance?
If someone is single, or in a relationship with another “income generator,” then, there may little or no need for insurance. The primary reason that a same-sex couple would buy life insurance is for “income replacement.” In other words, two people get accustomed to a lifestyle that requires most or all of their combined incomes.
While there may be situations where a non-partner (parent, sibling, etc) is partially dependent on one’s income, the most common situation is one where two partners share a home, and if one of the partners died, the other partner would want to remain in the house. Since home-related expenses are usually a couple’s largest expense, overall expenses for the surviving partner are only reduced fractionally upon the other’s death, while the household income (and future retirement savings contributions) may drop significantly.
How much life insurance do you need?
The “rules of thumb” and online life insurance needs calculators are all over the map, ranging from getting insurance that’s 10 times annual expenses all the way up to 20 times annual expenses (or income). Many life insurance calculators steer a person towards paying off a mortgage with life insurance. This is a mistake for most dual-income same-sex couples, because the cost of the debt, especially after factoring in tax deductions and inflation, is generally less than what one could reasonably expect to earn on their investments over, say, 10, 20, or even 30 years. A partner’s death doesn’t change the math. Instead of buying enough insurance to pay down mortgage debt, each partner can buy enough insurance to help the surviving partner meet all household expenses for a period of time, which can include the ongoing mortgage payment.
Let’s take a classic DINK example: Ron and Jake are a couple, with Ron’s take-home pay at $150,000 and Jake’s at $75,000. Let’s assume that, upon one partner’s death, monthly expenses drop from $18,000 to $15,000 (costs for clothing, food, entertainment, etc, will drop). Ron’s annual shortfall would be $36,000 and Jake’s would be $108,000, so each would want to buy enough insurance (on himself) to cover each other’s shortfall, unless the surviving partner was willing to adjust his lifestyle (selling the house, for example). The question now becomes: How long does the surviving partner need to have “income replacement”? Forever? Until the mortgage is paid in full? If each person thought 15 years was sufficient, then Ron could buy $1.6 million ($108,000 x 15) and Jake could buy $540,000 ($36,000 x 15). This assumes the proceeds sit in the bank and get depleted for 15 years.
Ultimately, there is no one-size-fits all rule for life insurance. If you have questions about your own insurance needs, reach out to a financial advisor.
On a side note, I’m pleased to announce that I recently became certified as an Accredited Domestic Partnership Advisor (ADPA).