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Personal Finance FAQ

Should You Insure Your Future Social Security Check?

The remarks about my reaching the age of Social Security and coming to the end of the road, they jolted me. And that was good. Because I sure as hell had no intention of just sitting around for the rest of my life. So I’d whip out the paints and really go to it.
–Norman Rockwell

Generally speaking, financial planners assume that when a spouse passes away, the remaining spouse does not need that spouse’s Social Security checks any longer.

After all, food, health care, and travel costs would go down, amongst other costs.

In addition, spending in retirement follows a smile pattern, with increased spending at end of life to deal with health costs. So, once a spouse passes, spending should revert to normal for the remaining spouse.

However, there are a lot of costs that are set regardless of how many people use them.

For example, many spouses in bereavement have to face the decision of whether or not to downsize, and many of them choose not to. Mortgages (hopefully the house is paid off!), insurance, property taxes, and upkeep remain the same, regardless of the number of residents in the house.

When my grandfather passed away, one of the laments my grandmother had was that it was hard to shop and cook food for just one person. As a result, she started going out to eat a lot more. As the research of the University of Guelph’s Elizabeth Vesnaver, along with Heather Keller, Olga Sutherland, Scott Maitland, and Julie Locher shows, widows have a much lower interest in food preparation after widowhood than they did when they were married.

So, in a time of dire need and stress, a bereaved spouse may find that the sudden reduction in income due to the loss of the departed’s Social Security income could put them in financial peril.

There, financial planners should consider whether or not a couple should insure their Social Security checks.

After all, delaying Social Security is one of the highest guaranteed return decisions a person can make.

The framework I used was a simple one: is it cheaper to buy the insurance a priori or keep that money invested in the stock market?

I took our situation as a rough example. I’m currently 47 and my wife is 46. Let’s assume that my age 70 Social Security payment will be $1,500 a month (ah, the joys of using capital gains from entrepreneurship to fund retirement).

The worst case scenario in terms of timing would be for me to peel the garlic the day before my 70th birthday, when Social Security payments would have kicked in.

I took a look at immediateannuities.com to get a quick, simple quote. If you’re ever in this situation, please shop around!

If I assume 3% inflation each year, then the price would be $573,405.80.

I then looked at how much it would cost for me to get whole life insurance. I specify whole life insurance in this case rather than term life insurance (which I usually recommend) because this is meant to replace income permanently.

So, there are two ways to pay for this insurance.

First, you can pay monthly or annually.

I checked out State Farm’s whole life insurance estimator.

Granted, there is a cash balance component that means that you’d need to solve for guaranteed cash + death benefit to get to your target amount, which I did not do (see below).

The second alternative is to buy the policy up front.

I checked out the Local Life Insurance single premium calculator to get this quote.

If you think about it conceptually, the most expensive time for an annuity is when you need it right away.

We can see this when we see what my wife would have to pay for an annuity to insure my future Social Security checks 23 years from now.

After age 70, the expenses go down, because the actuarial life expectancy goes down, so the amount that the insurance company expects to pay decreases over time.

Therefore, to analyze this, we must first see what rate of return we would have to have in order to be ambivalent between buying the paid up policy or paying for life insurance over time. I solved for equivalency at age 70, because, after 70, the insured’s cash value would go up, leaving the spouse the ability to withdraw the cash and invest to pay for an immediate annuity in the future.

In this scenario, my wife would have to get an 8.4% rate of return on the one-time payment amount of $139,512.20 in order to be just as well off financially for making those annual payments.

That’s below the historical S&P 500 average, but as we saw in “Whoa, Whoa, Whoa…Aren’t You Overreacting to the COVID-19 Pandemic?” we are looking to solve for tail end risk, or, in this case, bad scenarios. Here, the bad scenario would be poor returns meaning that you’d be much more out of pocket to pay those premiums over time and making the decision to forego the insurance payments. Insurance company wins.

Furthermore, the monthly payment between now and age 70 is what we’d expect to get out of my Social Security checks at age 70. That doesn’t seem like a good tradeoff.

Then, we need to evaluate what sort of returns in the market we’d need to have on the $139,512.20 lump sum to have $573,405.80 in 23 years. That return is 6.3%. Better, but maybe a little hairy. You’d definitely want to talk to your planner about that scenario.

Naturally, there’s a bit of a sliding scale here. If you’re retiring at age 65 or age 70, then your expected Social Security check should be bigger, so it may represent a larger portion of your post-retirement income. Then again, you’ll have a lot longer to save for retirement. That said, insurance will be more expensive, as it’s more expensive to insure a 70 year old than a 47 year old, even assuming that the 70 year old is insurable in the first place.

The easiest solution to this is to not retire where you’re dependent on both spouses’ Social Security checks. This is particularly true for early retirees. If early retirees are going to plan on Social Security, they should plan on the income from the lower earning spouse. That way, if one spouse passes, the expected income is not harmed, and first to pass sequence does not matter.

Therefore, when analyzing the need to insure Social Security, I recommend evaluating the higher paying spouse’s Social Security payment.

There’s no easy answer to this question, but this article should provide you a framework to evaluate the need for insuring your Social Security payment in the future.

Did you insure your Social Security future payments? Let’s talk about it in the comments below!

By Jason Hull, CFP®

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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