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The life insurance blackout period is referring to the Social Security blackout period. This is the period when a widow with children will cease to receive any Social Security benefits until she reaches the age of 60 if she remains unmarried when she can receive a widow’s benefit at her age of 60.
When a working husband dies, there are Social Security monthly income benefits for the widow who is caring for the children under age 16.
The children are then able to receive a monthly survivor benefit until they reach age 18, or to age 19 if they remain in high school.
The result is that the widow, or widower, if that is the case, faces a void of income between the time the youngest child reaches age 18 until the parent reaches age 60, at which time the parent receives a survivor’s benefit based on the credits the deceased parent accrued during his or her working years.
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How the Blackout Period Works
Here’s an example. A mother is 28 years old and has two young boys who are in school. One boy is 8 and the second boy is five years old. The father dies and leaves the family with the following Social Security benefits figures are imaginary and not related to real Social Security amounts.
The mother will receive a monthly survivor’s benefit until the boys are age 16. Assume that she receives $500 per month for the eight year old for eight years, or $48,000, and $500 per month for 11 years until the five-year-old is 16, or a total of $66,000. That is a total of $114,000.
Then the boys will receive a monthly benefit until they are age 19, assuming that they both attend high school. Assume that the amount they receive each is $250 per month.
The 8-year-old will receive the money for 11 years for a total of $33,000, and the 5-year-old will receive $250 per month for 14 years or a total of $42,000.
All told, the mother will receive a total of $237,000, and even though part of the money was paid to the boys, it would be paid to the mother as the guardian, and she would have control of the money for their welfare.
Once the last boy is 20 years old, all income to the mother stops, and she has no more money from Social Security until she is age 60.
The Blackout Period Begins
When the youngest boy reaches age 20, the mother will be 15 years older, or age 43. She will be without any income, other than that she would receive if she worked for 17 years.
Sometimes it is difficult for a widow who has spent the bulk of her life raising a family to suddenly go out and find meaningful work, and that is why it is a good idea for life insurance to provide for that eventuality during the blackout period.
Over the years, life insurance professionals had addressed the blackout period so that widows, in particular, would have the means to survive the years when there was no more Social Security income.
A bit preposterous? Not at all. No one knows what financial condition might befall an individual, and if a mother spends most of her time raising children until the are in their 20s, she is sacrificing a career and perhaps training for a career as well.
We have already seen that just a few hundred dollars per month over a period added up to a good sum of money, $237,000 to be exact.
To have money coming in on a regular basis, and then to have it suddenly can be quite a shock. So it is not a silly idea to provide for the widow until she can once again draw money from Social Security at age 60.
One method of planning for the blackout period for a widow is to use a method called “programming.”
Programming utilizes the settlement options of life insurance to provide a certain amount of income for a certain period. The needs for life insurance are separated into two categories, the cash needs, and the income needs.
The cash needs are comprised of:
- Final Expenses
- Emergency Fund
- Mortgage Payoff
- Educational Expenses
The income needs would be made up of:
- Income for the time period that the children are home and in school
- Income to the widow during the Blackout Period until she is age 60
- Income for the widow to supplement income starting at age 60 for retirement
The income requirements would then be apportioned to the appropriate settlement options in the life insurance policy itself to provide the necessary amounts of income for the time periods required.
Capital Needs Allocation
A capital needs approach would involve selling an amount of life insurance that would be the corpus of a trust or an amount of insurance that would pay interest on the principle where the interest after taxes would provide the necessary income.
For example, if the average income required would be $30,000 per year, and interest earned would be estimated at 3 percent, then the amount of life insurance required would total $1,000,000.
This is more of an inexact method as it involves more estimates than precision, and it will always involve the necessity of selling more insurance coverage.
The programming method is more exact and does not require as much life insurance to be in effect to get the job done.
The blackout period is a very harsh dilemma for many parents who suddenly become single parents with younger children. Life insurance professionals should consider the blackout period in their family life insurance planning, as it can be a very difficult experience.
Unless the surviving spouse has some kind of training or a career, he or she will have a fairly solid base of income with the Social Security monthly income while the children are younger and in high school.
Once the children graduate from high school, the surviving spouse’s income dwindles to zero for 10 to 15 years or so. It doesn’t take much extra life insurance to provide and extra $500 or $1,000 per month for that period.
Remembering to consider this length of time where income could be zero for a good many years, you will do the surviving spouse a huge favor by programming the life insurance into the entire plan.
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