Cram for the Test
Social Security’s Earnings Test applies to people who are below “normal” retirement age: 66 if you were born in 1943 to 1954, rising over time to 67 for those born in and after 1960. And in some cases, the Earnings Test can decrease or wipe out survivor benefits.
Consider a hypothetical 40-year-old widow with a 10-year-old child, earning $49,834 per year. Theoretically, she’s eligible to receive $1,277 per month—or $15,324 per year—in survivor benefits. But even though her income puts her squarely in the middle class, it fails the Earnings Test—and effectively erases her benefits:
$49,834 income - $17,640 threshold = $32,194
$32,194 ÷ $2 = $16,097
In other words, her survivor benefit would disappear. That puts a young widow with a young child at a big financial disadvantage.
How life insurance can help
Life insurance can help cover the loss created by Social Security’s Earnings Test in a few ways. First, when a loved one passes away, the death benefits from a life insurance policy can replace their earnings and help cover their family’s future expenses. When choosing a life insurance policy, factors that should be considered include the policyholder’s age, future earning potential and expenses that should be covered in the event of their death, such as a mortgage, college costs and day-to-day living.
It’s also important to consider the other things your spouse’s job makes possible, such as health insurance or a 401(k) match—income that would be lost if your spouse dies.
Using life insurance to replace income is especially crucial during a Social Security “blackout period”—the time between when a surviving spouse’s child turns 16 but the surviving spouse hasn’t yet turned 60. (In our hypothetical case, the blackout period spans 14 years—a long time to go without help from Social Security.)
Counting on Social Security survivor benefits to replace income in the event of a loved one’s death can be a gamble. Life insurance can put the odds in your favor—and relieve the financial stress after a loved one’s passing.