A life insurance payout can be a real lifeline for families who are trying to cope financially after the loss of a loved one.
Life insurance companies typically offer a variety of payout options for life insurance death benefit proceeds: a lump sum, an annuity, installment agreements and other similar structured payout plans, although this can vary by company and by policy. The default payout of most policies is a lump sum of the death benefit.
Receiving such a substantial amount of money all at once can feel overwhelming. That’s why it’s so important to take time to understand the best ways to manage a lump-sum life insurance payout. These tips from financial professionals can help.
Don’t rush to make big financial decisions
The best thing to do when you receive a lump-sum life insurance payout is to hold onto that money for several months before making any significant financial decisions.
“If you have received a life insurance payout, this is one time where it may make sense to let the cash just sit in your account,” says R.J. Weiss, a CFP® professional and founder of the personal finance education website The Ways to Wealth. “Your goal is to make a rational, educated decision, not an emotional one.”
Keeping a payout in cash will allow you to cover bills and other pressing financial needs in the months after losing a loved one. Just don’t leave the money in a checking account, says Daniel Kopp, a fee-only, fiduciary financial planner and founder of Wise Stewardship Financial Planning, which specializes in serving widows, widowers and service members.
Consider a high-yield savings account
Instead, you may want to consider putting the payout in a high-yield savings account to earn interest on the balance. If you received a large payout, you might have to spread the money out over several savings accounts. That’s because Federal Deposit Insurance Corporation deposit insurance covers only $250,000 per depositor, per FDIC-insured bank.
After making sure you’ve covered all of the immediate expenses, your first priority is using some of a life insurance payout to build an emergency fund, Kopp says. This will give you a cash reserve so you won’t be derailed by the unexpected, he notes.
Financial professionals typically recommend having enough in an emergency fund to cover three to six months’ worth of expenses. If the money is kept in a high-yield savings account, it can earn interest and be easily accessed if and when emergencies arise.
If the loved one you lost was the breadwinner, you may want to set aside more in an emergency fund to keep you afloat financially as you search for a job. You can simulate a monthly paycheck until you’re getting one of your own by setting up automatic transfers from your savings account to your checking account.
Pay off high-interest debt
If you have high-interest debt such as credit card debt, you could use a lump-sum life insurance payout to eliminate that debt, Kopp says. By paying off what you owe, you’ll free up more cash in your budget each month to cover other bills and to have more of a financial cushion.
Wondering whether to pay off a mortgage with a life insurance payout? It depends on your situation, Kopp says. You might be considering using the money to pay off your mortgage if the thought of that big monthly payment is keeping you up at night. You may also want to consider the trade-offs of other approaches as well, such as savings accounts or investment vehicles. Working with a financial professional can help.
Find a trusted financial advisor
Figuring out how to invest a lump-sum life insurance payout can be difficult on your own. That’s why it can be smart to hire a financial planner. “Having that third party to walk through options will help,” Kopp says. When he lost his wife in 2017, Kopp says he hired a financial planner “to be that rational third party to help me see the errors in my thinking.” It can also equip you with the information and perspective needed to make sound financial decisions.
You may want to work with a financial planner who is a fiduciary – a professional who is legally and ethically bound to act in the best interests of a client. You can find a fiduciary financial advisor through organizations such as NAPFA, the XY Planning Network and Fee-Only Network.
Kopp suggests working with a planner that specializes in helping widows or widowers. “This needs to be somebody who can relate emotionally,” he says. Take the time to interview several advisors to find the best fit for your circumstances.
Cameron Huddleston is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. She also is an award-winning journalist who has been writing about personal finance for more than 17 years. You can learn more about her at CameronHuddleston.com. Opinions are those of the author and those interviewed.
Haven Life Insurance Agency (Haven Life) does not provide tax, legal or investment advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction.