Chris Stein, CFP®
What Is the Lump-Sum Death Benefit?
Most recipients of Social Security benefits have heard about this mysterious lump-sum death benefit that is paid out upon a worker’s death. They may have even heard that it is a $255 benefit. But few people know the history of this benefit and why it is for such a small and odd amount. Let me try to shed some light on this little understood benefit.
Who can receive this benefit?
Social Security may pay a lump sum benefit of $255 to:
A spouse who resided with the deceased person at the time of death; or
A spouse or child who, in the month of death, is eligible to receive a SS benefit based on the deceased person’s work record
History of the Lump Sum Death Benefit (LSDB)
The LSDB was part of the original Social Security Act of 1935, although it was not intended as a burial benefit as most assume. In the original SS Act there was no provision for Survivor’s Benefits and the concern was a lack of equity for those people who died before reaching age 65, which was the Full Retirement Age at the time. For this reason, a provision was added to the Act to award LSDB to survivors in the amount of 3.5% of the deceased person’s covered earnings. These payments were made from 1937 through 1939 and since the maximum covered earnings in those years was $3,000, the highest LSDB to be paid was $315 ($9,000 x 3.5%), although most payments were for considerably less. In December 1939 the average LSDB was $96.93. The benefit then evolved in the following way:
1939 – Survivors Benefits were added to the SS system so the original LSDB was discontinued. The new provision paid a LSDB only to family members who didn’t otherwise qualify for the new survivor benefit. It could also be paid to a non-family member who helped with the burial expenses of the deceased. The amount of the LSDB was set as 6 times the Primary Insurance Amount (PIA). The minimum payment ever made under this new system was $63.75 and the maximum $273.60, with the average in 1940 of $145.79
1950 – The restriction that paid LSDB only to survivors who did not qualify for survivor benefits was lifted so that all deaths of covered workers were potentially eligible for a LSDB. This same year the basic monthly benefits for retirees were increased for the first time since payments began in 1940. The increase of 80% was quite large and under the old calculation would have increased the LSDB dramatically so the formula was changed to define the LSDB as 3 times the PIA. This caused the average LSDB in 1950 to remain similar to before at $147.81
1954 – The current cap for the LSDB at $255 was enacted this year by Congress. While the LSDB in 1954 could be less than $255 if the worker’s PIA was less than $85, the LSDB was capped at a maximum of $255 as it remains today in 2016. By 1974 the lowest possible PIA hit $85 so from that year forward the lowest LSDB was also the maximum at $255.
1981 – Before 1981 if no spouse or child of the deceased worker were eligible for the LSDB, a funeral home or other person responsible for the funeral expenses could sometimes claim the LSDB. After 1981 the only people eligible for the LSDB are a spouse who resided with the worker at the time of death, or a spouse or worker who, in the month of death, is eligible for benefits on the deceased worker’s record. So now in some cases a LSDB is no longer paid.
While today’s post is certainly not a Social Security claiming strategy, hopefully it helped with everyone’s understanding of the total package of benefits available to covered workers in the Social Security system.
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