Do Life Insurance Benefits Affect Social Security Payouts?

Social Security only considers income earned from wages or net profit from self-employment when evaluating a reduction of your Social Security benefits. Furthermore, reductions apply only if you earn wages after you access your benefits and before you reach full retirement age. The agency does not consider unearned income with regard to your benefit amount at any age.

Unearned income can include lottery winnings, 401k payouts and the proceeds from a life insurance policy. For instance, if you receive Social Security retirement benefits and acquire insurance proceeds from a life insurance policy, it makes no difference whether you cashed in a whole-life policy or received the proceeds from a policy where you were named as beneficiary -- the Social Security Administration will not reduce your retirement benefit as a result of your increased cash flow.

Insurance policies that provide annual annuity payments during retirement do not qualify as a source of earned income; therefore, income from these annual payments does not reduce your Social Security check. Investment accounts that supply pension-type income do not affect your Social Security benefit either. Pension income from employment where you paid into the Social Security system will not negatively affect your benefit amount. However, if you worked for a government entity in noncovered employment, your benefit amount may decrease in certain circumstances. Social Security defines noncovered employment as any employment where you did not pay Social Security taxes.

If you receive a government pension based on noncovered employment, the Government Pension Offset can have a negative impact on your spouse’s Social Security benefit if the pension your spouse receives is also based on noncovered employment. The reduction equals two-thirds of the pension amount, which could entirely eliminate any Social Security benefit check.

The SSA uses a modified benefit formula to figure reductions in Social Security benefits based on the Windfall Elimination Provision. The WEP primarily affects you if you were a government employee who did not pay Social Security taxes and later worked in a job where you did pay into the system, and worked long enough to qualify for benefits. If you turn 62 during the year of publication, the formula takes the first $749 of your average monthly earnings and multiplies by 90 percent; then multiplies the next $3,768 by 32 percent; and then multiplies the remaining average income by 15 percent. The SSA than adds the resulting amounts together to determine you total monthly benefit amount.