Connecting the Dots: Using Life Insurance With Social Security

Episode 304 – Even when you optimize your Social Security claiming strategy, there are still going to be problems that need fixing. Life insurance can be the perfect tool to address some of the shortcomings that Social Security creates.

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Transcript of Podcast Episode 304

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, Connecting the Dots: Using Life Insurance With Social Security.

Even when you optimize your Social Security claiming strategy, there may still be problems that need fixing. Life insurance can be the perfect tool to address some of the shortcomings that Social Security creates.

Optimizing Social Security is often much more complicated than many people realize. For almost everyone, even when you get the most you can out of it, it’s still not nearly enough to meet your monthly expenses. And certain circumstances can cause income shortfalls or gaps even with maximized Social Security benefits. Here, we examine some of those shortfalls that Social Security fails to address, and how life insurance can help fill in those gaps.

Surviving Spouse’s Benefit

Survivor benefits are one of few aspects of Social Security that, in most cases, are relatively simple. As long as both spouses live past their Full Retirement Age (assume age 67), the survivor benefit is simply the higher of the two benefits. For example, if I collect $2,000 per month and my wife collects $1,000 per month, the survivor benefit is $2,000. If I die before she does, her benefit goes up from $1,000 per month to $2,000 per month. If she dies before me, my survivor benefit stays at $2,000. Note that we are ignoring the effect of annual cost of living adjustments, but the concept applies either way.

So, for my wife, there’s good news and bad news. The good news is that if I die first, her benefit doubles. The bad news (aside from the fact that I’m no longer there!) is that as a household, the total benefit has gone from $3,000 per month to $2,000 per month.

If she’s like most people, she’ll probably want to stay in her own home for as long as she can. She’d prefer to avoid going into assisted living or a nursing home until she must.

But until then, what happens to the household expenses? The mortgage payment will likely stay the same, as will the real estate taxes. And without me there, the maintenance expense may actually go up. So, the expenses stay the same or go up, while the household income goes down.

This is where life insurance comes in. A relatively small policy, say $300,000, purchased at age 60, can be used to create a pool of money to help replace the lost Social Security income after the first spouse dies.

But of course, there’s no guarantee that I will be the first to die. All things being equal, she probably will outlive me since females generally live longer than males, but there is no way of knowing. So, to do the job properly, you may need to have a separate $300,000 policy for each spouse.

“Hedging” Your Social Security Bet

Here’s another situation where life insurance can help. No matter when I collect my Social Security benefit, I am essentially making a bet. If I’m in good health and believe I can afford to wait, collecting Social Security at age 70 may be the best choice. It almost certainly will be the right choice if I live into my late eighties or beyond. But if I die before I get there, I’ve lost in more ways than one.

I may expect to live a very long time, but what if I’m wrong? If I can afford it, one way to hedge my bet is to use life insurance.

Here’s another example. Let’s say I’m age 60. I will reach Full Retirement Age at 67, but I have options. I can collect as early as age 62 or as late as age 70. Let’s say my full benefit is $3,000 per month at age 67. If I start at age 62, my benefit would be reduced by 30 percent, to $2,100. If I wait until age 70, the benefit will grow by 8 percent per year (non-compounded), or up to $3,720 per month.

But what if I die suddenly just before my 70^th birthday? I decided to forgo $108,000 of cumulative Social Security benefits that otherwise could have been collected and enjoyed if I had started at age 67; even more if I had collected at age 62.

Side bar

Keep in mind that the so-called “earnings test” could make it difficult, if not impossible, to collect your Social Security benefit prior to Full Retirement Age if you continue to work. In 2025, the earnings limit is $23,400. There will be a benefit reduction of $1 for every $2 of excess wages you earn above that amount. The earnings test goes away when you reach Full Retirement Age.

In this example, if I’m 60 years old and healthy, I could consider purchasing a $200,000 life insurance policy. That way, if I died, there would be additional money for my heirs to replace the Social Security income I chose to forego.

How much would it cost? Using Security Mutual Life’s Security Designer WL4U3 10 Pay, a male preferred nonsmoker aged 60 could purchase a guaranteed death benefit of $200,000 for an annual premium of $13,053. The policy would be fully paid up at age 70 when the insured files for Social Security. Should the insured unexpectedly die before that age, the policy would replace most, if not all, of the income given up by waiting. In this example, if the insured survives to 70, the policy’s guaranteed cash value would be $114,324 (provided premiums are timely paid) and continue growing each year the policy remains in force thereafter. This cash value provides an important living benefit for the policyowner. The cash value can be used to supplement the retirement income.

These are just two of the ways in which life insurance can be beneficial in Social Security optimization. There are numerous other instances where life insurance can help with Social Security and retirement planning. The possibilities are endless. Consult a life insurance advisor from Security Mutual Life today to explore how life insurance can complement Social Security benefit selection strategies.

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The examples provided are hypothetical and are not intended to serve as a projection of any specific life insurance policy. The depicted strategy may not be suitable or appropriate to your individual circumstances. The material presented should not be interpreted as a recommendation.

Policy Form Nos. 2112-NY-17CSO; ICC14-2112; Series 2112. Insurance products are issued by Security Mutual Life Insurance Company of New York. Product availability and features may vary by state. Eligibility for life insurance is subject to the Company’s underwriting rules and receipt of payment. Premium rates will vary based on any and all information gathered during the underwriting process, and medical exams may be required. Life insurance policies contain exclusions, limitations and terms for keeping them in force. Your agent can provide costs and details. Guarantees are based on the claims-paying ability of Security Mutual Life Insurance Company of New York.

We encourage readers to seek personalized advice from a qualified professional regarding their personal financial circumstances and objectives.

The illustrations provided are hypothetical and are not intended to serve as a projection of any specific life insurance policy. The material presented should not be interpreted as a recommendation.

This podcast is brought to you by Security Mutual Life Insurance Company of New York, The Company That Cares^®.  The content provided is intended for educational and informational purposes only.  Information is provided in good faith.  However, the company makes no representation or warranty of any kind regarding the accuracy, reliability, or completeness of the information. 

 The information presented is designed to provide general information regarding the subject matter covered.  It is not to serve at legal, tax or other financial advice related to individual situations, because each person’s legal, tax and financial situation is different. Specific advice needs to be tailored to your situation. Therefore, please consult with your own attorney, tax professional and/or other advisors regarding your specific situation

 To help reach your goals, you need a skilled professional by your side.  Contact your local Security Mutual life insurance advisor today.  As part of the planning process, he or she will coordinate with your other advisors as needed to help you achieve your financial goals and objectives.  For more information, visit us at SMLNY.com/SMLPodcast.  If you’ve enjoyed this podcast, tell your friends about it.  And be sure to give us a five-star review.  And check us out on LinkedIn, YouTube and X (formally Twitter).  Thanks for listening, and we’ll talk to you next time.

 The applicability of any strategy discussed is dependent upon the particular facts and circumstances.  Results may vary, and products and services discussed may not appropriate for all situations.  Each person’s needs, objectives and financial circumstances are different, and must be reviewed and analyzed independently.  We encourage individuals to seek personalized advice from a qualified Security Mutual life insurance advisor regarding their personal needs, objectives, and financial circumstances.  Insurance products are issued by Security Mutual Life Insurance Company of New York, Binghamton, New York.  Product availability and features may vary by state. 

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