A life insurance payout could be a real lifeline for families who are trying to cope financially following the loss of a family member.
Life insurance providers typically provide a variety of payout options for life insurance coverage death benefit proceeds: a lump sum, an annuity, installment agreements along with other similar structured payout plans, even though this can vary by company and by policy. The default payout of most policies is a lump sum of the death benefit.
Receiving this type of substantial amount of cash all at once can feel overwhelming. That's why it's so vital that you take time to comprehend the best ways to manage a lump-sum life insurance coverage payout. These tips from financial professionals might help.
Don't rush to make big financial decisions
The best thing to do whenever you get a lump-sum life insurance coverage payout would be to hold onto those funds for many months prior to making any significant financial decisions.
“If you've received a life insurance payout, this really is one time where it may seem sensible to allow the cash just sit in your account,” says R.J. Weiss, a CFP(R) professional and founding father of the personal finance education website The Ways to Wealth. “Your goal would be to make a rational, educated decision, not an emotional one.”
Keeping a payout in cash will allow you to cover bills along with other pressing financial needs within the months after losing a family member. Just don't leave the money in a checking account, says Daniel Kopp, a fee-only, fiduciary financial planner and founding father of Wise Stewardship Financial Planning, which focuses on serving widows, widowers and repair members.
Consider a high-yield savings account
Instead, you might want to consider putting the payout inside a high-yield checking account to earn interest around the balance. Should you received a sizable payout, you might have to spread the cash 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 applying a number of a life insurance payout to construct an emergency fund, Kopp says. This gives you a cash reserve so you won't be derailed through the unexpected, he notes.
Financial professionals typically recommend having enough in desperate situations fund to cover 3 to 6 months' price of expenses. When the cash is held in a high-yield checking account, it may earn interest and be easily accessed assuming emergencies arise.
If the family member you lost was the breadwinner, you might want to put aside more in desperate situations fund to help keep you afloat financially as you look for a job. You can simulate a monthly paycheck until you're getting one of your by setting up automatic transfers out of your savings account for your bank account.
Pay off high-interest debt
If you've high-interest debt for example credit debt, you could utilize a lump-sum life insurance coverage payout to eliminate that debt, Kopp says. By fully repaying what you owe, you'll release more cash in your budget each month to cover other bills and also to have more of a financial cushion.
Wondering whether or not to pay off a mortgage with a life insurance coverage payout? It depends on your situation, Kopp says. You might be considering using the money to pay off your mortgage if the considered that big monthly payment is keeping you up during the night. You may even want to consider the trade-offs of other approaches too, for example savings accounts or investment vehicles. Working with a financial professional might help.
Find a trusted financial advisor
Figuring out how to invest a lump-sum life insurance payout can be difficult on your own. This is exactly why it can be wise to employ a financial planner. “Having that 3rd party just to walk through options can help,” Kopp says. When he lost his wife in 2021, Kopp says he hired an economic planner “to be that rational 3rd party to help me begin to see the errors within 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 certain to act in the best interests of a client. You will find a fiduciary financial advisor through organizations for example NAPFA, the XY Planning Network and Fee-Only Network.
Kopp suggests working with a planner that specializes in helping widows or widowers. “This must be somebody who can relate emotionally,” he states. Take the time to interview several advisors to find the best fit for the circumstances.