Understanding Spousal Survivor Benefits

Your married clients are partners who depend on each other and have built a life together. So when one of those clients is no longer there, and his or her Social Security checks stop coming, how will that impact the surviving client’s lifestyle?

Fortunately, the surviving spouse will receive the larger of the couple’s two Social Security checks as a survivor’s benefit. But that still means the loss of one check.

Here are some strategies to help ensure the survivor continues to have the needed level of income to maintain his or her lifestyle.


Strategies for Maintaining Your Client’s Level of Income

Scenario 1

  • A husband and wife both receive Social Security benefits at age 66, which is full retirement age for both.
  • While the husband is alive, the couple receives a combined monthly benefit of $3,000 ($2,000 in the form of the husband's benefit and $1,000 in the form of the wife’s benefit).
  • If the husband dies first, the wife receives the higher of the two amounts ($2,000) as a monthly survivor’s benefit.
  • Impact on the wife: One-third of the Social Security income she used to rely on is gone.

To address this scenario, there are two strategies to consider:

 

The Savings/Investments Approach

Before they retire, help your clients build up savings and/or investments so that, when one spouse dies, the survivor can make up for the lost Social Security check by withdrawing from those assets.

Step 1

Use an income-and-expense worksheet to help clients determine how much income the surviving spouse will need each year to replace that lost Social Security check after one of them dies. Let’s say that’s $650 per month:

$650 per month x 12 months = $9,000 per year

Step 2

Decide how many years of replacement income the surviving spouse feels he or she may need. Let’s assume it’s 17 years. By doing some simple math, you’ll be able to determine the total amount the surviving spouse needs to withdraw from savings over those years:

$9,000 per year x 15 years = $153,000 in total withdrawals

Here are a few questions to ask when considering the savings/investments approach:

  1. Can your clients save the entire amount needed for income replacement?
  2. If clients choose to rely on investments, how likely is it that the investments will perform as expected?
  3. Even if the client is successful at building up savings/investments, what if he or she needs the extra income longer than 17 years? Will the savings/investments run out?
 

The Immediate Annuity Approach

An immediate annuity is a financial product that provides your clients with immediate (that is, within one year of contract issue) and steady income payments guaranteed to last their entire lifetime. The possible advantages of using an immediate annuity versus savings/investments to replace income include the following items.

Efficiency

It would take only $141,330 to purchase an immediate annuity with a Life with Cash Refund Payout option to generate $9,000 in income per year.1 Based on the calculation above, that’s $11,670 less than saving or investing may require.

Guaranteed Payments for Life

Once the annuity is purchased, the income payments are guaranteed for life. No matter how long the surviving spouse lives, his or her income will never run out.

The Option of Getting the Purchase Amount Back

The Life with Cash Refund Payout option of an immediate annuity means that, if a client dies shortly after purchasing the annuity, his or her estate or beneficiaries would receive the initial $141,330 purchase payment minus any income from the annuity already received.

1Based on a single life immediate annuity with a Life with Cash Refund Payout option for a female age 74 as of November 2017.
 
 

Scenario 2

  • A husband and wife are both age 70 or older.
  • They use both spouses' Social Security payments for essential expenses.
  • For nonessential expenses, they are taking required minimum distributions (RMDs) from an IRA.
  • Impact on either spouse if the other dies: More money will need to be withdrawn from the IRA to meet essential expenses, which will drain savings faster.

The Variable Annuity Optional Benefit Approach

Before or during retirement, clients such as these might consider purchasing a variable annuity with an optional guaranteed minimum withdrawal benefit. If one spouse dies, the optional benefit can be used for replacing lost Social Security income, enabling the surviving spouse to:

  • Continue using RMDs from the IRA for nonessential expenses.
  • Continue to keep the money in his or her variable annuity invested while the optional benefit provides the needed lifetime income.

Pacific Life offers two optional guaranteed minimum withdrawal benefits that can be considered when this strategy is employed. These benefits do not guarantee a rate of return or growth rate, and only one can be purchased with any variable annuity for an additional cost.

 

For Up to 7% Income: Enhanced Income Select

Enhanced Income Select provides two levels of income for surviving spouses:

  • An enhanced amount of guaranteed income equal to 7% (Joint Life option) of the protected payment base for spouses age 70 and older as long as the variable annuity contract value is greater than zero. (Withdrawal percentages vary by age. Lower rates apply where first withdrawals occur prior to age 70.)
  • Guaranteed lifetime income of 3% if the contract value goes to zero.

Plus, Enhanced Income Select offers annual resets to capture market gains on any contract anniversary. This can increase the client’s income amount.

 

For Traditional 4.5% Income: Core Income Advantage Select (CIA Select)

CIA Select is another optional guaranteed minimum withdrawal benefit that can start any time after age 65. It provides your client with:

  • Guaranteed lifetime income equal to 4.5% (Joint Life option) of the protected payment base that will continue even if the contract value drops to zero.
  • Annual resets to capture market gains on any contract anniversary.
 

Calculating the Cost of This Approach

How much of an initial purchase payment would be needed for a variable annuity with one of these optional guaranteed minimum withdrawals benefits?

Step 1

Using the math in the “Savings/Investment Approach” section above, determine the amount of annual income the surviving spouse needs to replace lost Social Security when his or her partner dies.

Step 2

Use the formula below to determine the initial purchase payment required. For “Withdrawal Percentage,” use the percentage available with the optional benefit you selected.

Projected Lost Income ÷ Withdrawal Percentage = Initial Purchase Payment

Additional Social Security Topics

 

Want to Talk Further on this Topic?

The Retirement Strategies Group, subject-matter specialists with advanced degrees and designations such as CFA®, CFP®, ChFC®, CLU®, and JD, are ready to help.

Call:
(800) 722-2333, ext. 3939
In New York, (800) 748-6907, ext. 3939

Email:
RSG@PacificLife.com


Investors should carefully consider a variable annuity’s risks, charges, limitations, and expenses, as well as the risks, charges, expenses, and investment goals of the underlying investment options. This and other information about Pacific Life are provided in the product and underlying fund prospectuses. These prospectuses should be read carefully before investing.

Annuity withdrawals and other distributions of taxable amounts, including death benefit payouts, will be subject to ordinary income tax. For nonqualified contracts, an additional 3.8% federal tax may apply on net investment income. If withdrawals and other distributions are taken prior to age 59½, an additional 10% federal tax may apply. A withdrawal charge also may apply. Withdrawals will reduce the contract value and the value of the death benefits, and also may reduce the value of any optional benefits. 

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. 

Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.

No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency