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Prudential Research & Perspectives Our original research and thought leadership provide vital insights into important issues for our clients, financial professionals, policymakers, and the general public.

How the Social Security Earnings Test May Increase the Need for Life Insurance

The Social Security Earnings Test applies to Social Security retirement benefits, allowing the Social Security Administration (SSA) to withhold retirement benefits if an individual is under Full Retirement Age (FRA) and his or her earnings exceed a certain level.

What’s less widely known is that the Earnings Test also applies to Social Security survivor benefits prior to retirement. Families who are relying on the availability of survivor benefits in the event of a wage earner’s death may not realize that the Earnings Test could reduce or eliminate those benefits entirely.

This can be devastating to a family depending on the income from survivor benefits, especially for a widow or widower caring for young children. Fortunately, the creative use of life insurance can help bridge the income gap in these instances.

The graph below shows an example of how the Earnings Test might impact a 40-year-old woman earning $49,834 per year who is a recent widow with a 10-year-old child. The example is based on 2017 limits and illustrates how the Earnings Test impacts Ann’s survivor benefit differently if she earns more or less income. Further explanation of this example is included in the paper.

Proceeds from life insurance can help protect a family by filling a survivor’s income gap and making up for any survivor benefits depleted through the application of the Earnings Test.

To learn more about the Earnings Test and how life insurance may play a much-needed role, download How the Social Security Earnings Test May Increase the Need for Life Insurance.