Life Insurance And Social Security Survivor Benefits: What's The Link?

When a worker passes away, their family members may be eligible for Social Security survivor benefits. These benefits are typically paid to the widows, widowers, and dependents of the deceased worker. While life insurance death benefits are paid as a lump sum, Social Security survivor benefits are usually paid out monthly. It's important to note that life insurance and Social Security serve different purposes, and the combination of the two can provide financial security for loved ones left behind. In some cases, life insurance can impact Social Security disability benefits, but it generally doesn't affect retirement benefits.

Life insurance and Social Security retirement benefits

Life insurance is a contract between an individual and an insurance company, where the insurer promises to pay a designated beneficiary a sum of money upon the insured person's death. The beneficiary can be a family member, a non-family member, a trust, a charity, or an estate. The policy owner chooses the beneficiary and the amount of the death benefit when purchasing the coverage. Life insurance policies can be categorised into term life insurance and whole life insurance. Term life insurance covers a set period, often 1, 10, or 20 years, while whole life insurance covers a lifetime as long as premiums are paid.

Social Security retirement benefits, on the other hand, are government-provided benefits that individuals become eligible for upon reaching retirement age. These benefits are based on the individual's work history and are designed to provide a source of income during their retirement years. In the United States, the Social Security Administration manages these benefits, and they are funded by payroll taxes.

When it comes to the interaction between life insurance and Social Security retirement benefits, it is important to note that they generally do not affect each other. If an individual is receiving Social Security retirement benefits and is also a beneficiary of a life insurance policy, the life insurance payout is considered unearned income and will not impact their Social Security benefit amount. Additionally, Social Security retirement benefits typically do not consider investment income, pensions, capital gains, or inheritances when determining the benefit amount. As a result, receiving dividends from a whole life insurance policy or taking out a loan against a life insurance policy is unlikely to affect an individual's Social Security retirement benefits.

However, it is worth mentioning that different types of life insurance policies can have varying impacts on an individual's overall financial situation. While term life insurance policies generally maintain the same face value over the term, whole life insurance policies accrue cash value over time. This cash value component can be accessed and used for various purposes, such as supplementing retirement savings. In this case, the utilisation of the policy's cash value could indirectly influence an individual's overall financial standing, including their eligibility for certain needs-based programs or benefits.

In conclusion, life insurance and Social Security retirement benefits serve distinct purposes in financial planning. While life insurance provides a lump-sum payout to beneficiaries upon the insured person's death, Social Security retirement benefits offer ongoing income during an individual's retirement years. Although these two financial tools usually operate independently, the cash value and payouts from life insurance policies may have implications for certain individuals' overall financial circumstances and eligibility for specific benefits or programs.

Life insurance and SSI

Life insurance, on the other hand, is a private contract between an individual and an insurance company, where the company agrees to pay a designated beneficiary a sum of money upon the death of the insured person. This payout is typically income tax-free and can be used by the beneficiary for any purpose, such as covering final expenses or supporting a surviving spouse or family.

Now, how do these two things interact? A life insurance payout is considered a countable asset for SSI purposes. This means that if you receive a life insurance payout, it will be added to your other countable resources when determining your eligibility for SSI. If the payout pushes your total resources above the SSI limits ($2,000 for individuals, $3,000 for couples), your SSI benefits may be reduced or discontinued until your assets fall below the limit again.

It's important to note that not all assets count towards the SSI resource limit. For example, your home, burial plots, and life insurance policies you own with a combined face value of less than $1,500 are typically exempt. Additionally, if you are receiving Social Security retirement benefits, a life insurance payout is generally considered unearned income and won't impact your benefits.

However, if you are receiving Social Security disability benefits through the SSI program, a life insurance payout could affect your benefit amount or even put your eligibility at risk. This is because SSI has stricter financial requirements than Social Security retirement benefits.

In summary, while life insurance can be a valuable tool for providing financial protection to your loved ones in the event of your death, it's important to be aware of how it may interact with any government assistance programs you or your beneficiaries are enrolled in, such as SSI. If you have specific questions or concerns about your situation, it's always best to consult with a financial advisor or tax attorney.

Who qualifies for survivor benefits?

Survivor benefits are available to surviving spouses, ex-spouses, minor children, older disabled children, and dependent parents. In certain cases, stepchildren, grandchildren, and step-grandchildren are also eligible.

Those who may qualify for survivor benefits include:

• A surviving spouse aged 60 or older (age 50 or older if they are disabled).
• A surviving spouse of any age who has not remarried and is caring for the deceased's child (or children) who are under age 16 or are disabled.
• An unmarried child of the deceased who is younger than age 18 (or up to age 19 if a full-time student in an elementary or secondary school), or 18 or older with a disability that began before age 22.
• A stepchild, grandchild, or step-grandchild under certain circumstances.
• Parents, aged 62 or older, who were dependent on the deceased for at least half of their income and whose own Social Security benefit would not be larger than that of the deceased offspring.
• A surviving divorced spouse, if they meet other eligibility requirements.

To qualify for a $255 lump-sum death benefit, the applicant must be either:

• A spouse who was living with the deceased or, if living apart, was eligible for certain Social Security benefits on the deceased’s record.
• If there is no surviving spouse, a child who is eligible for benefits on the deceased’s record in the month of death can receive this payment.

To qualify for monthly benefit payments, the applicant must be one of the following:

• A surviving spouse who is age 60 or older (or age 50 or older if they have a disability); who is any age and is caring for a child of the deceased who is under age 16; or who has a disability and is receiving Social Security benefits.
• An unmarried child of the deceased who is either younger than age 18, or up to age 19 if a full-time student in an elementary or secondary school; or who is age 18 or older with a disability that began before age 22.
• A stepchild, grandchild, step-grandchild, or adopted child under certain circumstances.
• Parents, age 62 or older, who were dependent on the deceased for at least half of their support.
• A surviving divorced spouse, under certain circumstances.

It is important to note that there are specific rules and variations in benefits for different types of survivors. For example, spouses can generally only apply for survivor benefits if their current retirement benefit is less than the potential survivor benefit. Additionally, there may be a "blackout" period where benefits cease for children once they turn 18 and resume for spouses when they turn 60.

How are benefits calculated?

The amount of money a survivor receives in social security benefits depends on several factors, including the deceased's lifetime earnings, the survivor's age, the survivor's relationship to the deceased, and whether the survivor is receiving social security themselves.

The more the deceased person earned, the higher the benefit. Benefits are based on how much the deceased would have collected at full retirement age if they were still alive.

Those who collect social security benefits before they reach retirement age receive a reduced benefit. After their death, their survivors will, too.

• Spouses: A surviving spouse at full retirement age (e.g. age 67 if born after 1960) can receive 100% of the deceased's benefit. A surviving spouse between age 60 and full retirement age can receive 71.5% to 99% of that benefit. A surviving spouse between ages 50 and 59 can receive 71.5%. A surviving spouse of any age who is caring for a child under age 16 can receive 75%.
• Divorced spouses: Divorced spouses who have not remarried may be eligible to receive benefits at the same percentages as surviving spouses, as long as they were married to their former spouse for at least 10 years.
• Children: Children under age 18 (or 19, if still attending primary or secondary school) and adult disabled dependent children can receive 75% of the deceased's benefit.
• Dependent parent: A surviving dependent parent can receive 82.5% of the benefit. If there are two dependent parent survivors, they are eligible to collect 75% each.

Are survivor benefits enough?

Survivor benefits can be a lifeline for families who have lost a provider. However, the question of whether they are enough depends on several factors, including the age of the survivor, the survivor's relationship to the deceased, and the income of the deceased.

Monthly Payouts

Survivor benefits provide monthly payments to eligible family members of a deceased worker who paid Social Security taxes. The amount of the monthly benefit depends on the deceased worker's average lifetime earnings, with higher earnings resulting in a higher benefit. In general, survivors can receive between 70% and 100% of the benefits that the deceased worker would have received in retirement.

For example, a surviving spouse at full retirement age (e.g. age 67 if born after 1960) can receive 100% of the deceased's benefit, while a surviving spouse between age 60 and full retirement age can receive between 71.5% and 99%. A surviving spouse between ages 50 and 59 can receive 71.5%, and a spouse of any age caring for a child under 16 can receive 75%.

Children under age 18 (or 19 if still in school) and adult disabled dependent children can receive 75% of the deceased's benefit, while a surviving dependent parent can receive 82.5%.

Lump-Sum Death Benefit

In addition to the monthly benefit payments, survivors may also qualify for a one-time lump-sum death benefit payment of $255 to help with final expenses.

Meeting Basic Needs

While survivor benefits can help meet a family's basic needs, they may not be enough to maintain the desired lifestyle. It is recommended that families have additional assets, such as life insurance, significant savings, or another form of income to make up the difference.

Life insurance, in particular, can be a valuable supplement to survivor benefits as it offers more flexibility in naming beneficiaries, provides a lump-sum payout, and allows the policy owner to determine the benefit amount.

Frequently asked questions