Civil Unions/Domestic Partnership and Same-Sex Marriage are not the same for any purpose, including insurance

At the recent NE Chapter of the AICP e-day there was a discussion of “civil unions” in the “hot topics” session with a panel of regulators and former regulators from several states in the region. One of the interesting things to me was that the regulators on the panel were all from states with same-sex marriage but the industry representative asking the questions and facilitating the discussion kept using the terms “civil union” and “domestic partnership.” It was clear to me that there was confusion about the differences between these statuses in his mind and in the mind of many in the audience.

That is not too surprising. As many commentators have noted, the number of states with same-sex marriage and the percentage of people who support same-sex marriage has risen dramatically with unprecedented speed.

However, so many insurance products have spousal benefits it is essential that we in the industry understand the differences, and be precise when we discuss the issues. This was again brought to my attention in a brief bullet point discussion in the most recent edition of NAFA Annuity Outlook, May/June 2013. On page 9, it states:

On a different topic, many states are allowing civil unions. That means many annuity contracts are being modified or amended to say that you can pass on the annuity, not just to a spouse, but also to a partner. But the issue is the tax law is federal law. And the federal law didn’t change. So with civil unions, there will still be a federal taxable event.

This one brief statement combines civil union, partnership, and spousal language without the clarity I would like to see. Some states do provide for civil unions. Others have domestic partnerships.

And a growing number have same-sex marriage. Same-sex marriage is not the same as civil union. Contracts that provide spousal benefits do not need to be modified to change any language, because a spouse is a spouse in those states. The problem is that federal laws do not recognize all state law marriages as being equal. DOMA prevents the IRS from recognizing legal state recognized spousal relationships. DOMA is what creates the problem for insurance companies in administering their contracts consistently. If it were not for DOMA, spouses in any state would be treated the same. DOMA being struck down would not force any state to pass same-sex marriage, but it would mean that in those states where same-sex marriage is legal, all spouses would be treated the same and contracts in those states would apply equally to all spouses.

Civil Unions and domestic partnerships are different. Some states have said that they should be treated the same as marriages for some purposes, and that language has to be added to insurance contracts to effect that similar treatment. And it is true that “with civil unions, there will still be a taxable event.” But the more challenging problem contractually is that for some spouses, spouse doesn’t really mean spouse, because DOMA prevents it. In that case, federal law extra-contractually modifies the term to take away the rights for some spouses that are granted to other spouses. Until DOMA is repealed or struck down, this will be a major headache for insurers.

It was clear from the regulator panel at AICP that their view is that insurers and producers should not be telling same-sex spouses that certain contracts are not available to them or are, per se, unsuitable because of, for example, spousal continuation. That means that company personnel and producers need to be able to understand the state-specific rules and they have to be clear how those rules impact contractual provisions. It also needs to be clearly explained what same-sex spouses would experience as far as federal tax treatment today and how that might change if – or in my opinion, when – DOMA is no longer federal law. It may be a very reasonable decision for a married same-sex couple to decide that they think DOMA will not be law when a spousal continuation provision would be triggered and that they want to buy the product with that feature, even though it is not currently available.

For a couple with a civil union, the repeal or striking down of DOMA will likely have no effect on spousal continuation, because they are not spouses. Civil unions are not the same. And it is essential that our industry understand the source of the confusion and what could be done to make it so much easier to administer contracts that have spousal rights. It is very simple – repeal DOMA.