If you’re like most Americans, you’re concerned about what will happen to your surviving loved ones after you’re gone. Overwhelmingly, life insurance continues to be the primary resource for ensuring that spouses and children don’t suffer after their primary breadwinner has passed. In fact, statistics from the Bureau of Labor Statistics show that the take-up rate for life insurance (the rate at which eligible workers participate in a plan) reached as high as 98 percent nationwide in 2020.
However, shopping for life insurance coverage often involves taking a myriad of factors into consideration before deciding how much to purchase. For example, one crucial factor to remember is the Social Security blackout period (also known as the “blackout period for life insurance,” or simply the “blackout period”), which can wreak havoc on a surviving family’s income. Before we discuss the Social Security blackout period, it’s first necessary to explain briefly what Social Security survivors' benefits are, and how they’re calculated.
As the name implies, a Social Security survivors benefit (SSSB) is a monthly benefit paid out to the closest surviving relatives of the deceased. Typically, Social Security survivors benefits include:
Dependent Parent’s benefits
Here’s a breakdown of the eligibility requirements for receiving an SSSB:
Surviving spouses can receive a Mother's or Father’s benefit until their child reaches 16.
Children can receive a Child’s benefit until the age of 18 (or 22 if they’re disabled).
At retirement age, the surviving spouse can receive a Widow’s/Widower’s benefit; but this can’t be paid until he/she reaches the age of 60.
There are lots more eligibility requirements and restrictions involving SSSB payments — but one of the most crucial and misunderstood of all SSSB restrictions is the blackout period.
The Social Security blackout period is the phase during which a surviving spouse cannot receive any social security benefits. The blackout period begins when the surviving spouse’s youngest child reaches the age of 16, or 19 and two months for full-time students (or 22 for disabled children).
Simply put, until the blackout period, the widow/widower is eligible for a monthly SSSB; but once the children reach the above-listed ages, the surviving spouse is not eligible for further Social Security survivors' benefits until he/she reaches the age of 60. However, if you’re disabled, and your disability occurred within seven years after your spouse’s death, you are deemed eligible for survivor benefits when you turn 50.
Once the surviving spouse reaches 60, they’re eligible again, and SSSB is paid according to the number of social security credits the deceased spouse accrued during their working years. In some cases, the surviving spouse (once they reach 62) has to choose between taking survivor benefits or retirement benefits. Generally speaking, when this happens, if the surviving spouse is under full retirement age, it's advisable to opt for survivor benefits instead, and wait until the retirement benefits have fully matured before taking them.
With so many restrictions, it's not surprising that for a surviving spouse without a tangible source of income, the blackout period for life insurance can be a tremendous source of psychological and physical turmoil, exacerbated by the stress of living under constant financial uncertainty.
There are two key ways of forestalling the challenges brought by the blackout life insurance period: Programming and capital needs allocation. Here’s an explanation of the two:
Programming: With programming, you pay an extra amount of money into your life insurance coverage, which enables your surviving spouse to cope until he or she is eligible for widow’s/widower’s benefits.
Capital needs allocation: This involves purchasing an adequate amount of life insurance so that the survivor can live off of the interest.
To make things clearer, here’s a description of how these two strategies can be used to circumvent the social security blackout period.
In programming, life insurance policy benefits are paid according to a settlement option. With a settlement option, the person insured receives a regular income from the insurer, paid in regular installments as opposed to a lump-sum payment. The goal of a settlement option is to provide a regular, dependable income stream for the person who’s insured. In this sense, it’s comparable to a pension or annuity.
The amount of income paid in these installments can be set according to the needs for which the life insurance coverage was purchased. These needs are typically categorized as “cash needs” and “income needs,” and the differences, as you’ll see, are self-explanatory.
Cash needs include:
Paying off a mortgage
Final expenses for funerals and burials
Income needs include:
A surviving spouse’s income during the blackout
A widow’s/widower’s supplementary income at the age of 60
Necessary income before dependent children reach the age of 16
Based upon the calculations for these above needs, the life insurance premium is allocated as a regular payment stream in order to cover these expenses.
The capital needs approach involves choosing a policy amount that produces enough interest to cover the income needs of the surviving spouse. In other words, the amount of life insurance taken out will depend upon the amount of interest it can earn — and that interest (after taxes are taken out) will provide the necessary income stream for the survivor.
The capital needs strategy is not as exact as the programming strategy but is instead based upon a rough estimation of probable expenses and relies upon the accruing interest to take care of them each month. Before choosing this approach, however, it’s important to first consider whether the survivor’s outstanding debts can be paid in a timely manner under this system.
Besides these life insurance strategies, some financial advisors recommend setting aside funds for funeral expenses and keeping them in a savings bank where they’ll accrue interest. This way, the surviving spouse will have the needed extra money to pay off all funeral/burial costs, without further depleting income during the blackout period.
Another strategy is to purchase additional life insurance coverage for the surviving spouse. With this additional policy, when a spouse dies, the surviving spouse can cash in their policy to help cover expenses and make up for the income reduction during the blackout period.
Regardless of your age or income, purchasing life insurance is one of the best ways to help replenish the surviving spouse’s depleted income during the Social Security blackout period. Therefore, it’s important to comb the market to find the best insurance rates available. Likewise, without proper foresight, the blackout period can be a devastating time for a surviving spouse, not only financially, but emotionally as well. That’s why it’s extremely important to weigh all these considerations — and to be aware of blackout period restrictions — before purchasing life insurance coverage.
Choosing the right life insurance seems complicated enough without having to consider the dire circumstances caused by Social Security restrictions and blackout periods. Likewise, it’s not ideal to spend more money than you expected to on a life insurance policy. However, it’s crucial to remember that the extra money spent on a quality policy with comprehensive coverage will ensure that your surviving spouse won’t have to struggle to make ends meet for the rest of their life.
Dealing with Social Security survivors' benefits and their correlating blackout periods can be daunting, and decisions can often seem overwhelming, especially for someone who is already overwhelmed with grief over the loss of a loved one. If you have any questions about SSSB or blackout periods, PolicyScout will be happy to help you find the answers you need. Likewise, if you’re interested in purchasing life insurance to protect your loved ones, contact us for a confidential quote, so you can rest assured your family members will be safe and protected no matter what happens.