Does life insurance affect Social Security benefits?

It depends on why you're collecting your Social Security benefits. A life insurance payout won't typically impact your benefits if you're collecting Social Security due to retirement. However, if you have a disability and use the Supplemental Security Income (SSI) program, life insurance can affect your Social Security benefit.

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Life insurance and Social Security retirement benefits

If you're receiving Social Security retirement benefits and you're the beneficiary of a life insurance policy, the payout would be considered unearned income; therefore, it wouldn't impact your retirement benefit at all. You would continue to receive your Social Security benefit in the same amount.

What if I want to use my policy's cash value?

Social Security retirement benefits typically don't factor in investment income, pensions, capital gains, or inheritances when determining the benefit amount. So even if you receive dividends from a whole life policy or take out a life insurance loan against your policy, your Social Security retirement benefit shouldn't be impacted.

Does life insurance affect Social Security disability benefits?

If you're collecting Social Security disability benefits, receiving a life insurance policy payout or taking out a loan against your own policy's cash value can impact your Social Security benefit amount. It may even put your Social Security benefits in jeopardy.

Life insurance and SSI

The Supplemental Security Income (SSI) program is the Social Security program available to people with disabilities. The SSI has strict asset limitations and is considered a needs-based program, so if your countable resources exceed SSI limits, you may find your benefits cut or discontinued.

To qualify for SSI, your countable resources can't be more than $2,000 as an individual or $3,000 as a couple. And while many assets don't typically count toward the resource limit (such as your home, burial plots, and life insurance policies you own with a combined face value of less than $1,500), a life insurance payout is considered a countable asset and may easily push you over the threshold.

A life insurance payout that exceeds $2,000 would put you above the $2,000 individual asset limit, resulting in your benefits being decreased or even terminated until your assets fall below the asset limit again. In most cases, once your assets have fallen below the asset limit, you'll be eligible for SSI again.

Can you have life insurance while on SSI?

Yes, but in most cases you can only own life insurance policies with a combined face value of $1,500 or less to remain eligible for SSI. Remember that permanent life insurance types have a cash value component that can increase your policy's face value over time, while term life policies generally maintain the same face value over the entire term, as long as you pay your premium on time.

Also, money collected via permanent life insurance dividends or a life insurance loan would be considered a countable resource. Therefore, depending on the amount, using these life insurance policy features could result in your SSI benefit amount being decreased or discontinued.

Social Security asset limits and other qualifying conditions can be complicated, so consult a tax attorney or financial advisor to discuss the particulars of your situation.