By Marc Gilman
(800) 927-9326 |
This is the first post in a three-part series on the greatest financial risks retirees face — and the insurance strategies built to address each one.
Key Takeaways
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The death of a spouse isn’t just an emotional loss — it’s a measurable, lasting financial one. Research from the Federal Reserve Bank of Chicago found that surviving spouses see their annual income drop by an average of $5,500, a decline that persists for at least two years and represents roughly an 11% reduction in income.
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Social Security income typically drops to the higher of the two spouses’ benefits — not the sum of both — which can mean losing a third to half of household Social Security income overnight.
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The risk of losing a spouse is often made worse by a second, related risk: long-term care costs. When one spouse needs extended care before passing, that care can quietly drain the very assets the surviving spouse was counting on to live.
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Long-term care insurance — whether a standalone policy or a rider on an annuity or life insurance policy — is one of the few tools built specifically to keep a care event from becoming an income event for the surviving spouse.
How Much Does Losing a Spouse Actually Cost in Retirement?
For most couples, retirement income is built assuming two people will be there to receive it. When one spouse passes away, the household doesn’t just lose a person — it loses a source of income, often permanently.
Federal Reserve Bank of Chicago research quantifies this: surviving spouses see their annual income fall by roughly $5,500 on average, a drop that holds steady for at least the two years following the loss. For many retirees living on a fixed income, that’s not a rounding error — it’s the difference between a comfortable retirement and a stretched one.
Social Security is usually the first place this shows up. A surviving spouse doesn’t keep both benefit checks — they receive the higher of the two. If both spouses had similar earning histories, that can mean a 30% to 50% cut to household Social Security income the month after a death, even though most of the household’s fixed expenses (the mortgage or rent, property taxes, utilities, insurance) don’t shrink at the same rate.
Pension income can disappear entirely if a survivor benefit option wasn’t elected at retirement. Filing status changes from “married filing jointly” to “single,” which often pushes the survivor into a higher tax bracket on less income — sometimes called the widow’s or widower’s penalty. And for Medicare beneficiaries, a change in income (say, from selling assets to cover gaps) can trigger IRMAA surcharges the surviving spouse never had to think about before.
Why Is This Risk Connected to Long-Term Care?
Here’s the piece that often gets missed: the risk of losing a spouse and the risk of needing long-term care aren’t separate problems — they’re frequently the same problem, arriving in sequence.
Most long-term care isn’t paid for by insurance or Medicare. It’s paid for out of savings, investments, and home equity — the same assets the surviving spouse will eventually need to live on. When one spouse requires extended care, whether at home or in a facility, that care can run for years, and the average lifetime cost can move well past six figures.
If those costs come out of the couple’s joint savings before the first spouse passes, the surviving spouse isn’t just facing the income drop described above — they’re facing it with a fraction of the assets they expected to have left. It’s a compounding risk: less income, and less of a cushion to make up the difference.
Where Does Insurance Planning Fit In?
This is exactly the gap long-term care insurance is designed to close — and today, that protection comes in more than one form:
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Standalone LTC insurance provides dedicated coverage for care costs, keeping those expenses separate from the couple’s retirement savings entirely.
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Hybrid life insurance with an LTC rider allows care costs to be paid from the policy’s death benefit while alive, with any unused benefit passing to the surviving spouse or heirs if long-term care is never needed — addressing the common concern about “paying for insurance you might not use.”
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Annuities with an LTC rider can provide an enhanced payout specifically for qualifying long-term care expenses, often with simplified underwriting compared to traditional LTC policies.
Each of these structures is built to do the same job: prevent a care event for one spouse from becoming a financial crisis for the other. Which structure makes sense depends on your health, your existing assets, your family history, and how you’re already positioned with life insurance or annuity products. For a fuller walk-through of how these options compare, see our complete guide to long-term care insurance — or bring the question to a licensed advisor rather than guessing at it.
What To Do Next
If you and your spouse haven’t reviewed how a long-term care event or the loss of one of you would affect the other’s retirement income, now is the time — before a health event forces the decision. Gilman Agency can walk you through standalone LTC, hybrid life insurance, and annuity-based LTC rider options side by side, and help you see how each would actually play out for your household.
Call us at (800) 927-9326 or email to schedule a review.
Next in this series: the cost of long-term care — and how hybrid coverage protects your savings.
Sources: Federal Reserve Bank of Chicago research on post-widowhood income, as cited in Investopedia (“When You Lose a Loved One, Your Retirement Plan Deserves Extra Care,” Sara Clarke); Social Security Administration survivor benefits guidance.
