There are many difficult decisions people must make when a loved one passes away.
“A sudden and large influx of money” is not one of the first that jump to mind. But, for many people, this can be a very real and very overwhelming concern.
As the beneficiary of a life insurance policy, you may find yourself staring at your checking account and wondering, “What should I do with this money?”
Do you pay off debts? Start a college fund? Invest the payout? Life insurance proceeds help provide you with the financial comfort and freedom the policyholder intended you to have.
Ultimately, dealing with death is a very personal situation. But when determining what you should do with a death benefit, here are some things to consider.
Decisions in the claim process
Usually, beneficiaries are presented with options for receiving the amount in a lump sum, getting installments or for the life insurance company to hold onto the proceeds in an interest-earning account.
This is a personal decision. Many people choose to have a lump sum amount of the money sent to them. If you decide to not collect the proceeds immediately from the life insurance company, you can opt for them to remain held in an account, available and earning interest, for when you’re ready to approach the collection process. (FYI – Interest earned when a life insurance company holds onto a death benefit is deemed taxable income.)
Don’t rush into any decisions
The decision of what to do with a life insurance policy can feel like one that requires immediacy. And often, the first thing that comes to mind is to pay down balances on the mortgage, car loans and any other practical expenses.
However, the first thing you should consider doing is continuing to live your day-to-day life and focusing on feeling as normal as you possibly can. Most people say you should take at least six months before making major decisions.
“After my father had passed away, my family was dealing with many overwhelming decisions and challenging life changes. And his life insurance policy was not on the top of the list to figure out,” said Matt Wolf, Product and Actuarial Lead at Haven Life. “We ended up taking almost a year to make decisions as to what to do with the life insurance and agonized the entire time. Looking back, there was little urgency.”
Keep paying toward the mortgage. Maintain your monthly bill payments. Stay with friends or family if you need to. Take time to grieve. You do not want to rush into any decisions while you are distraught.
Take care of immediate needs first
A life insurance policyholder buys coverage to help their family maintain a comfortable standard of living if they’re no longer around. It’s a selfless act and one that helps prevent a family from being further disrupted.
It’s likely that a beneficiary depended (at least in part) on the policyholder’s income for some time. But, when they die, that income stream immediately stops. Before considering debt elimination, focus on your family’s day-to-day needs.
Keep the kids in their daycare and at their same school. Consider staying in your home to maintain normalcy. Continue covering car payments, cell phone bills, utility bills and other monthly expenses.
You may want to consider utilizing the life insurance proceeds for debt repayment and any form of investing only after assessing your immediate needs.
Enlist help where needed
When death or illness occurs, you’ll be humbled by the outpouring of offers for help and support. Take them up on it. Enlisting the help of siblings, children and other family members can relieve an immeasurable burden to make decisions.
This might also be the right time to work with a financial advisor. They can provide unbiased guidance on how to strategically utilize the life insurance proceeds in the short and long term.
“My family tends to be a do-it-yourself one,” said Wolf. “After my father had passed away, there was an immediate pressure for us, my mother, in particular, to take on all of the things he used to do himself – the taxes, managing retirement assets, and paying the bills. We helped my mother locate a few financial advisors to speak with about her situation. In the end, she decided not to work with any of them on an ongoing basis. However, initial consultations gave her comfort that she was aware of all her options and not missing important decisions.”
No matter who you choose to tap, if there’s an opportunity to work with experts or financially-smart-minded individuals to help you make an informed decision, consider taking it. Again, give yourself time to process and vet the right person before jumping into any big decision.
Paying off high-interest debt
When you’re ready to start utilizing larger amounts of life insurance proceeds, consider eliminating debt first. And start with debts that have higher interest rates.
If you have high-interest debts like a credit card, it should be prioritized to close out those accounts to avoid going deeper into debt. With lower interest rate debts, such as a mortgage, consider the total balance owed and what the monthly payment is. If the rest of the mortgage takes up the full amount of the death benefit, it becomes a more complicated decision. You’ll want to consider the costs of staying in the house long-term and if it makes sense for your family and your future financial situation.
Paying off the mortgage
One of the biggest decisions a widow or widower will need to make is whether to stay in their current home. The answer isn’t as cut and dry as, “Well, is the payout enough to cover the mortgage? Then yes.” The upkeep, utilities, and taxes of a house can be expensive for one person to take on. Over time, some may think downsizing their home is the better option.
Before deciding to apply the full amount of a death benefit toward paying off a mortgage, consider sticking with making the usual monthly payments for the time being. If you might want to sell in a year or so when you’re feeling whole again, you’ll be happy you still have a financial cushion from the life insurance policy to get a new home.
Saving for your children’s college
Many people purchase life insurance to protect their ability to provide for their children’s future. Assuming the life insurance policy payout is large enough, consider putting extra money into a college savings plan or a minimally aggressive investment account. Both offer the potential to grow over time and can be utilized by children for education at a later date.
A four-year college degree is expected to cost around $176,000 by 2030. If you know the policyholder wanted to fund their child’s college expenses, then that’s a lasting legacy to leave.
Investing the life insurance proceeds
If you don’t need the life insurance proceeds to replace income and once your debts are paid off, you may want to consider investing the payout so that it has the potential to grow in value.
You can place the funds in an investment account that you already have, or open one through a broker-dealer or Robo Advisor like Betterment or Wealthfront. With the U.S. stock market historical average return at around 7%, there’s potential, over time, to increase the value of the money. Bear in mind that investing involves risk, and past performance doesn’t guarantee future results.
If you’re leery of the stock market, there are other ways to help grow your cash that doesn’t involve investing. As always, anytime you’re considering investing money, do your research beforehand and consult a trusted financial professional.
Don’t forget to spoil yourself a little
There is no harm in spending a little money on something that would make your family happy and honors the policyholder’s memory. Like with budgeting or even getting a pay raise, you should enjoy a little bit of the windfall too.
Your loved one named you as the beneficiary to the life insurance policy for a reason. They wanted your financial future to be as secure as possible and to ease the burden of loss. It’s also safe to say that they wanted you to be happy.
You shouldn’t find yourself paralyzed with fear because you don’t know what to do with a life insurance payout. By taking the time to cope with the loss, creating a game plan, and seeking the advice of qualified professionals, you can ensure that the life insurance policy your loved one purchased is put to good use.
This discussion is intended for general education only and is not legal, tax or investment advice. Haven Life doesn’t recommend any products or services discussed.