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What Insurance Issues Concern Unmarried Couples?

In General

Although having adequate insurance is important for most couples, unmarried couples should particularly consider how life and health insurance can help them address the unique concerns they face.

Caution: State insurance laws vary--an insurance professional in your state can give you more information about state laws that may affect your insurance coverage.

Life Insurance

Because you're not married, you're ineligible for many of the benefits the government, employers, and the tax code confer on married partners. Life insurance can provide a vehicle to address these concerns. It can replace income after the death of your partner, provide cash to pay potential estate taxes, and provide funds that avoid probate.

Health Insurance

Health insurance may be an issue if your employer offers coverage under a domestic partner benefits plan. The value of coverage provided to your unmarried partner is taxable to you as income, unless your partner qualifies as a spouse under local law or a dependent under federal tax law.

Life Insurance Provides a Vehicle to Address Special Concerns of Unmarried Couples

Because you're not married, you're ineligible for many of the benefits the government, employers, and the tax code confer on married partners. For example, Social Security and defined benefit pension plans don't replace income for your partner after your death, as they do for a spouse. Tax laws don't shelter your estate, as they do for a married couple. However, life insurance can provide a vehicle to address these concerns.

Life Insurance Provides Replacement Income After A Partner's Death

As the surviving partner in an unmarried couple, you may face a greater financial burden in maintaining your standard of living after the death of your partner than does a surviving spouse. You may not be eligible to receive income from many sources that a spouse might, or you may receive only limited benefits.

Social Security does not pay survivor's benefits to unmarried partners. While you may be eligible to receive Social Security based on your own earnings, or that of a deceased former spouse or ex-spouse, you can't receive benefits based on your unmarried partner's record. In addition, defined benefit pension plans typically don't automatically offer benefits to a nonspousal beneficiary.  A spouse, in contrast, is legally entitled to benefits under certain plans unless he or she waives that right.

Caution: You can receive distributions from qualified retirement plans, such as 401(k)s, 403(b)s, and individual retirement accounts (IRAs), provided your partner has named you as the beneficiary. However, spouses generally have more options when it comes to distributing or rolling over retirement funds--this presents a potential tax disadvantage for nonspouse beneficiaries. Life insurance provides replacement income to your partner. You can structure this by cross-owning life insurance policies or by purchasing an individual policy with your partner as the beneficiary.

  • Cross-owning life insurance policies--You each buy a policy on the other's life. At your partner's death, you collect the policy's death benefit and invest the proceeds to produce the income you need. Because your partner did not own the policy, the proceeds will not be included in his or her estate for federal gift and estate tax purposes. However, the value of the policy your partner owns on your life is includable in your partner's estate for federal gift and estate tax purposes.

Example(s): Shawn and Max are an unmarried couple. They each buy a life insurance policy on the other. When Shawn died, Max invested the proceeds and now lives off the interest. Because Max owned the policy, the proceeds paid upon Shawn's death.

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Weighing Costs Versus Benefits of Domestic Partner Health Coverage

If your employer offers health insurance to your unmarried partner, you may want to do a cost/benefit analysis before signing up. First, estimate the annual cost by adding the out-of-pocket cost to the additional taxes. Second, weigh this against the benefits of the policy to determine if this is a good deal for you and your partner.

Example(s): Pat and Terry are domestic partners. Pat works, while Terry rears the children. When Pat's employer, BigCo, Inc., begins offering health benefits to domestic partners, Terry considers signing up. Being a savvy couple, Pat and Terry calculate a rough estimate of the total annual cost before making a decision.

Step 1.

 

They estimate the annual out-of-pocket cost as follows:

 

 

 

Assume the premiums for Terry are

$600

 

+

Estimated deductibles/co-payments for doctor visits

+ 60

 

+

Estimated deductibles/co-payments for medication

+ 30

 

=

Total estimated annual out-of-pocket cost

$690

Step 2.

 

They determine Pat's additional tax per year as follows:

 

 

 

BigCo, Inc.'s share of the premiums

$1,200

 

x

Pat's tax on BigCo's contribution*

x.28

 

=

Total additional tax per year for Pat

$336

Step 3.

 

They add the estimated annual out-of-pocket cost

$690

 

+

They add the estimated annual out-of-pocket cost

+ $336

 

=

Total estimated annual cost of Terry's health benefits

$1,026

(*Pat's tax rate is 28%; yours may differ)

Example(s): Pat and Terry now see that the true cost of Terry's health insurance is $1,026 per year (the out-of-pocket cost plus the taxes), not $690. After examining the plan and feeling satisfied with its coverage, and knowing he can't get a better deal purchasing insurance elsewhere, Terry decides to enroll despite the additional tax. However, if Terry can purchase acceptable insurance on his own for less than $1,026 per year, or if the plan offers only limited or poor coverage, Terry may decline enrollment and search for coverage elsewhere.

Comparing Costs of Coverage Under a Domestic Partner Benefits Plan to Your Own Employer's Plan

Another situation you may face is that your employer offers health insurance and your partner's employer offers domestic partner benefits. How do you know which is the better deal to take? In this case, compare the annual cost of each plan before selecting coverage. You may find that the additional tax on the domestic partner coverage outweighs the benefits.

Example(s): Terry returns to work at Ace Company, which provides health benefits. Terry compares the annual cost of health benefits at Ace to the yearly cost under Pat's domestic partner benefits plan at BigCo as follows:

 

 

Ace Company

BigCo

 

Terry's annual share of the premiums

$800

$600

+

Estimated deductibles/copayments for doctor visits

$60

$60

+

Estimated deductibles/copayments for medication

$30

$30

+

Pat's additional tax per year

$0

$336

=

Total estimated annual out-of-pocket cost for Terry

$890

$336

Total annual savings under Ace's plan: $1,026 - $890 = $136

Example(s): Even though Terry's annual premiums are higher at Ace Company ($800 compared to $600), the total yearly cost is $136 lower because he and Pat avoid paying the tax on the domestic partner benefits. Since the coverage under both plans is comparable, it's a better deal for Terry to enroll in Ace's plan.

Enrollment and Continuation of Coverage Concerns

Before enrolling for domestic partner health insurance, especially if you also have the option of signing up for coverage through your own employer, ask whether the Consolidated Omnibus Budget Reconciliation Act (COBRA) applies to your coverage. This may vary by insurer. If you decline coverage now, you may be able to enroll during the next open enrollment period. Check with the employer providing the coverage.

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

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The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

 

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