Life insurance

Think you don’t need life insurance? Think again. Although typically associated with marriage, life insurance also makes financial sense for gay couples. It provides extra financial security for your partner upon your death—and it comes with the bonus of not being subject to income tax, which is especially useful to gay people.

To take out a policy, gay partners (no surprise) often need to prove their “insurable interest” in one another, unlike heterosexual married couples, who automatically qualify for insurance based on tradition. Fortunately, proof is often as easy as a mortgage statement or other evidence of joint financial responsibility.

The tricky part is when you consider how the insurance changes the value of your estate—and whether, when your estate passes to your partner, it will be taxed. Spouses can leave an unlimited amount to one another without triggering estate tax, but—thanks to our lack of federal marriage equality—gay people can leave each other only up to $2 million. At or above that amount, your partner can be taxed a whopping 45%.

So if you don’t think your estate will hit that threshold, you can stop reading now. Just find an insurance agent and buy a policy. But if your estate is already worth over $2 million (or will be), make sure that your partner purchases and owns a policy on you with him as the beneficiary. That’s not the usual way to do it: Agents will assume you want to buy and own the policy on yourself, as is customary. But that makes the policy a part of your estate and possibly subject to tax.

Cross-ownership gets around that by keeping the policy out of your estate. Say your partner buys and owns a policy on you to the tune of $1 million with himself as the beneficiary. When you die, he gets that money tax-free. What about owning that same $1 million on yourself? It’s factored into your estate and taxed accordingly, leaving him with much less.

Beware of pitfalls, though. Aside from possible gift-tax issues, the obvious one is if Mr. Right becomes Mr. Wrong, you’ll still own a policy on him. Don’t think forever is in the cards? Draw up an agreement explaining what will happen to the policies in the event of a split. It may not be romantic, but it’s better than being tethered to an ex for the rest of his life.