Should Early Retirees Who Will Depend on Social Security Buy Life Insurance?

People always live forever when there is an annuity to be paid them.
–Jane Austen

When I had clients who wanted to retire before they were eligible for Social Security, I would create models based on claiming Social Security at the appropriate time, giving them a secondary source of income beyond their investments.

In theory, Social Security should replace some amount of income that had been generated by investments, allowing retirees to accumulate less before retiring.

Even the fabled William Bengen 4% safe withdrawal rate study never mentions Social Security as a source of income.

Maybe he was making a political statement.

If the clients were a married couple (which they almost always were), then there was some sort of dependence on both spouses’ Social Security earning power in the future.

The most prudent path is to assume that you won’t receive Social Security when the time comes. That way, it’s all bonus.

However, doing that may alter the balancing act in determining when to retire between safety and the ever diminishing number of days you have left on this earth to do something.

So, what if you’re contemplating early retirement and have enough to safely make it until you can both claim Social Security and bolster your income, but need both sets of Social Security in order to get to the promised land of FIRE?

Life Insurance for Social Security

One possible answer is to purchase a fully paid whole life insurance policy to make up for the loss of that future income when the spouse passes.

Let’s assume that you have a 45 year old couple. She’s going to make $1,500 in Social Security at age 70 and he’s going to make $1,000 in Social Security at age 70 (to learn about Social Security claiming strategies, check out Lesson 14 of my Winning With Money series).

According to immediateannuities.com, the cost for buying an annuity to replace her Social Security income is $138,984 and the cost to replace his income is $83,426. Comparatively, investing that money now in an annuity would generate $442/month for her and $266/month for him.

Why am I quoting a deferred annuity cost now as opposed to the cost of an immediate annuity for a 70 year old?

If the spouse passes the day after the life insurance policy is bound, then the surviving spouse can purchase the annuity now for the payments to kick in then. Of course, there are other options for what to do with the money, but that is the purpose of the life insurance policy.

To get a $100k fully paid life insurance policy on him, the cost, according to Local Life Agents Premium Quote Engine is between $23,572 and $29,486, assuming he is insurable and depending on his health.

For her, the cost to get $150k of life insurance would be between $30,219 and $37,708.50.

If you assume the cheapest insurance, then, for her, she would need an annual average compounded return of 6.31% to be able to pay for the future annuity. For him, the return would need to be 5.18%.

Both of those are under what an expected blended return on invested assets would be, but not terribly far off. If I were a) not retired, and b) advising a client in this situation, I wouldn’t have heartburn if the client wanted to choose this path.

Run your own numbers, or seek the advice of a CFP who specializes in early retirement to see what you think.

Why Whole Life Insurance?

As I discussed in Lesson 6: A Contract on Your Life, I’m a big fan of term life insurance in most situations.

So, why not get a 25 year term life plan here?

The idea behind life insurance, in most instances, is that it needs to match replacing income or paying off debts at some point in time. That’s why I like term life insurance laddering.

Here, you’re trying to protect a future income stream between the time the first spouse passes and the time the second spouse passes.

If spouse A passes 2 days after the 70th birthday, the Social Security payment stream ends. A term life insurance policy is useless at that point, if it expired on the 70th birthday.

Why Single Premium?

This one is more of a preference for preventing mistakes in the future than a financial benefit.

You can probably pay monthly payments and wind up better off financially.

However, it’s also possible that, as you age, you may suffer cognitive decline, and math skills are usually the first ones to decline with age. Simply put, you may start to forget to pay that bill, and then wind up having your policy cancelled.

There are also some permutations to play out with who passes first and estate plans.

Again, this should be a discussion between your CFP and a trusted insurance agent.

We never counted on Social Security in making our decision to FIRE. When you retire in your 40s, Social Security isn’t going to be massive anyway. We have three main buckets of costs that are variable (travel, food, and healthcare) and enough to cover both of us until a ripe old age. Therefore, if one passes, it doesn’t negatively impact income. So, while it was useful to go through this exercise to see how much it would cost us in life insurance, it wasn’t necessary, and we decided not to insure our Social Security payments.

How about you? Have you ever looked at insuring your Social Security payments? Let’s talk about it in the comments below!

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Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. You can read more about him in the About Page.

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