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Have You Ever Thought of Your Social Security as Life Insurance?


A newly widowed client came to my office this month in despair. Her husband Dave had just passed away from an unexpected and sudden heart attack. She, the surviving spouse, was not currently working, opting instead to stay home to raise her son, (age 13) and step-daughter (age 17) who are both in public school.

Understandably she came to me asking for guidance and financial advice. She had no idea how she was going to be able to take over paying the families bills.My answer?: My client and her children can apply for a Social Security survivor payment.

When Dave worked, he paid into Social Security, because his employer deducted a portion of his earnings from every paycheck. Many people see this deduction on their paychecks and think FICA is code for Uncle Sam sticking his hand into their wallet.

In reality, Dave was paying for insurance for his survivors. Social Security calls this protection survivor benefits.

Through this program, spouses and children under the age of 18, and even dependent parents can become eligible to be paid survivor benefits.

Based on their father’s former earnings level, and the number of years worked; Dave accumulated worker credits that Social Security will use to determine how much each of Dave’s surviving family will receive as a monthly benefit. Both his spouse and his children are eligible to receive a monthly benefit from Dave’s Social Security. 

Social Security Survivors Benefits Can Be Paid to:

  • A widow or widower—full benefits at full retirement age, or reduced benefits as early as age 60

  •  A disabled widow or widower—as early as age 50
  • A widow or widower of any age who takes care of the deceased’s child who is younger than age 16 or physically challenged, and receiving Social Security benefits 

  • Divorced spouses under certain conditions 

  • Unmarried children younger than age 18, or up to age 19 if they attend elementary or secondary school full time 

  • Dependent parents age 62 or older

Under certain circumstances, benefits can be paid to stepchildren, grandchildren, or adopted children who were disabled before age 22 and remain physically challenged.

Source: 2015 How to Earn Credits Brochure- Social Security Administration

Worker Credits

The Social Security Administration requires up to 10 years of work, to be eligible for survivor benefits, at the family member’s time of death. Anyone born in 1929 or later needs ten years of work (40 credits) to be eligible for retirement benefits. People born before 1929 need fewer years of work. Survivors of very young workers may be eligible if the deceased worker was employed for 1½ years during the three years before his or her death.

When Dave died at age 57, he had only achieved 35 credits on his work record.

Since the number of credits needed for Dave’s case was 40, his family will be unable to apply for fully insured status. However, they will be able to apply for currently insured status through Social Security by using Dave’s credits for one and one-half year’s work (6 credits) in the three years just before his death. 

If the Spouse Is Younger than Full Retirement Age

My client was the same age as her husband – age 57. She has not yet reached full retirement age. Since she is caring for the worker’s (Dave’s) children, she will receive his Social Security benefit as a widow now. If she were not caring for his children, she would still receive a widow’s survivor’s benefit, but it would have been reduced, and would represent a smaller amount of his Social Security benefit. Social Security calculates full retirement ages for survivors based on the year they were born.

In the chart from their website listed below they include an example of 62 survivor benefits based on an estimated monthly benefit of $1,000 at full retirement age. If monthly benefits are applied for prior to full retirement age, the amount is smaller to take into account the lengthier period a person will receive them.

Social Security Administration’s Survivor Benefits Age Chart

Full (survivors) Retirement Age 2.

At age 62 3. a $1000 survivors benefit would be reduced to

Months between age 60 and full retirement age

Monthly % reduction 4.

 

1939 or earlier

65

$829

60

.475

1940

65 and 2 months

$825

62

.460

1941

65 and 4 months

$822

64

.445

1942

65 and 6 months

$819

66

.432

1943

65 and 8 months

$816

68

.419

1944

65 and 10 months

$813

70

.407

1945 – 1956

66

$810

72

.396

1957

66 and 2 months

$807

74

.385

1958

66 and 4 months

$805

76

.375

1959

66 and 6 months

$803

78

.365

1960

66 and 8 months

$801

80

.356

1961

66 and 10 months

$798

82

.348

1962 and later

 67

$796

84

.339

Source: Social Security Administration

Children’s Benefits

Unmarried children who are under age 18 (up to age 19 if attending elementary or secondary school full time) are also eligible to receive Social Security benefits when parent dies.

In some cases stepchildren, grandchildren, step grandchildren or adopted children may also be eligible to receive survivor benefits under certain circumstances.

The Social Security Administration Requires Surviving Children to be:

  • Unmarried
  • Younger than age 18
  • 18-19 years old and a full-time student (no higher than grade 12)
  • 18 or older and disabled. (The disability must have started before age 22.)

Within a family, a child may receive up to one-half of the parent’s full retirement or disability benefit, or 75 percent of the deceased parent’s basic Social Security benefit.

The formula used to compute the family maximum in 2015 is similar to that used to calculate the Primary Insurance Amount (PIA).

The family maximum payment is determined as part of every Social Security benefit computation. The formula sums four separate percentages of portions of the worker’s PIA. For 2015 these portions are the first $1,056, the amount between $1,056 and $1,524, the amount between $1,524 and $1,987, and the amount over $1,987.

Determination of family-maximum bend points for 2015

Amounts in formula

Average wage indices

For 1977:

9,779.44

For 2013:

44,888.16

Bend points for 1979

First:

$230

Second:

$332

Third:

$433

Computation of bend points for 2015

First bend point
$230 times 44,888.16 divided by $9,779.44 equals $1,055.71, which rounds to $1,056

Second bend point
$332 times 44,888.16 divided by $9,779.44 equals $1,523.90, which rounds to $1,524

Third bend point
$433 times 44,888.16 divided by $9,779.44 equals $1,987.49, which rounds to $1,987

Source: Social Security Administration

Exemptions

While most employers in the United States deduct Social Security from workers’ paychecks, there are some jobs that still do not. As a result, survivors would be ineligible Social Security survivor benefits. These employers include those who have worked for a railroad for at least ten years, and some employees of state and local governments who opted not to pay into Social Security. In these situations, their employers provided them a retirement pension plan instead of Social Security. 

Conclusion

Naturally each survivor’s situation is different. Monthly survivor benefits from Social Security may not be the only payments possible for your surviving family members. Social Security offers a one-time LSDP payment ( Lump Sum Death Payment.) Of course, additional life insurance is recommended. In most cases, Social Secuirty helps but does not adequately cover the income needed when a spouse passes away. 

It is prudent to contact a financial advisor to discuss not only your Social Security for retirement, but also explore what options your family would be able to have, in case something happened to you before reaching a full retirement age.

Social Security survivor benefits provide a valuable income for your surviving family members. Knowing how to apply and how to maximize these payments can significantly help family members through a difficult time.

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Image by Pictures of Money via flickr, licensed under CC by 2.0

 

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