After the passing of a loved one, the proceeds from a life insurance policy can help remove a portion of your stress. Allowing you to focus on your emotional needs without worrying about money. However, a sudden large sum of money can also bring up some hard choices. Before deciding what to do with it, you should first look at your assets and plans thoroughly. Do an overview of your financial situation to help decide what makes sense for you.
Taking a little time to really consider everything will not only help you decide how to use the money. But also, how you should collect it. You can generally receive a death benefit payout in a lump sum. Or in regular installments, either monthly, quarterly, annually, semi-annually etc. Below we’ll take a look at some of your options for using the payout to give you an idea of what you should be considering while making your decision.
How Life Insurance Payouts Work
For many people, receiving a death benefit for the first time can be overwhelming, especially when you don’t know how the process works. Don’t worry, everything is fairly simple. First you have to notify the life insurance company that your loved one has passed away. Then provide appropriate documentation, such as a death certificate. Once the claims process starts, you will typically receive payment within two weeks or less. Depending on how you choose to collect the payout.
The only time this would take longer is if there was an issue surrounding your loved one’s passing. Such as they committed suicide or gave the insurance company false information on their application. Both of these instances would render the payout void, which means that you won’t receive payout at all. However, let’s assume everything goes smoothly. When you receive the cash, it is tax-free which is a great benefit to you. Now, how do you use this money? There are no rules here, you are free to do whatever you want with this money. Below we’ve detailed some ideas on how you can use your payout.
Pay Off Debt
If you’re buried in debt, like many Americans are, it may make sense to take the lump-sum option and pay off any high-interest credit card debt or student loans. This not only eliminates your debt but frees up your income for monthly expenses. Even if you were to invest the money, if you have credit card debt, it’s unlikely that investment will pay off more than the interest you’re being charged on credit card or student loan debts. Having that lump-sum in your pocket may sound nice. But think about the extra money in your account each paycheck that isn’t going towards trying to pay down a debt. Overall it’s a smarter financial move that will actually save you more money than if you were to just start spending the money.
Build An Emergency Fund
A life insurance payout is a great opportunity to start or add to an emergency fund. A portion of your life insurance benefit can be placed in an interest earning account. Such as a savings or money market account. This money can later be used to pay for any future emergencies that could cost you a lot of money. Savings accounts ensure that unexpected expenses such as medical emergencies, home repairs, or temporary unemployment won’t derail your savings plan. Or worse, put your family heavily into a debt. Most financial experts recommend that you should have at least 3 to 6 months’ worth of living expenses in your savings. And if you’re self-employed or have unstable income, you should be saving twice that.
Consider Buying An Annuity
It’s common for beneficiaries to need the life insurance payout to help cover their monthly living expenses. This is especially true for young families who are trying to replace the breadwinner’s income, or for seniors whose spouse passed away and they now no longer have a second income or social security check. In these situations, it may make sense to use your life insurance policy death benefit to buy an annuity. Which is a type of account that will pay out a set amount of money over time, like monthly or yearly, they can even be set to continue for your entire life.
Some life insurance plans will even offer an annuity as a payout option for the death benefit. There are several types of annuities all designed to help reach specific goals. Some annuities are designed to provide an immediate stable stream of guaranteed income. Others are designed to help you save for long-term plans like retirement. However, annuities are complicated, so, if this sounds like an option for you, make sure you read any and all materials that come with whichever plan you’re considering. It may also be helpful to speak to a financial expert to make sure there are no hiccups or misinformation.
If the idea of receiving regular payments over time sounds appealing, but an annuity seems too complicated, there is a similar and simpler option. We mentioned earlier you have the option to receive your payout in installments from the life insurance company. Installment payments can provide a similar income guarantee without all the extra complexity. For example, the life insurance company may pay out 10% of the total death benefit every year over a 10 year period. The portion of the death benefit that is still in the account will typically continue to earn interest so it’ll also make more money over the years. However, keep in mind that while the death benefit itself may not be taxable, any interest you earn after opting for an installment payout may be taxable.
If you don’t have any pressing needs to use the money towards, like if your emergency fund is all set, bills are paid, debt is handled, it may be a good idea to take all or some of the payout and invest it. You can invest it in a combination of stocks and bonds for potential financial growth. If you’re not fully funding your 401K and IRA, for example, life insurance payouts can supplement your savings so you can pay more into your 401k. A 40-year-old who invests $100,000 in a taxable brokerage account and never invests again could accumulate $424,000 after 25 years, assuming a hypothetical annual return of 7%.
Build A College Fund
We all know, in today’s world, college is expensive with a capital E. Especially if you have more than one child. You can use a portion or all of the death benefit towards your children’s college fund with a 529 college savings account. Earnings on 529 accounts are tax-deferred, and withdrawals are tax-free as long as they are used for qualifying higher education expenses. An initial investment of $50,000 in a 539 college savings plan could potentially double within 12 years, assuming an annual growth rate of 6%. Considering death benefits can be very large. This may be a great way to make sure your kid’s education is taken care of.
For some people, if the death benefit is big enough, a combined approach could be a great option. You won’t have to choose one approach and go all in. For example you could use a portion of the death benefit to buy an annuity that creates a guaranteed monthly income stream for 12-15 years. At the same time you can take another portion of the payout and invest it in the stock market to let it start making you money.
Theoretically, this strategy would allow you to cover your immediate living expenses. While allowing the invested portion enough time to generate potential returns. If your portfolio generates a reasonable amount over the next 12-15 years then it could potentially generate income for another decade. Keep in mind though, that any option with investments means you have to accept a certain level of risk. There’s no guarantee the investments will do well.
Life Insurance Made EZ
Losing a loved one is difficult, and you may not know what to do with the money you will receive while you are in mourning. However, this money will provide you with the assurance that you can continue to provide for your family. Working with an agent who specializes in life insurance is the best way to find the right policy for you and your specific needs if you are looking for a policy for yourself and are unsure which policy is best.
Below is a list of the best life insurance companies in the country; each offers hassle-free service and the most affordable rates. Always check multiple sites to ensure that you have negotiating power and are aware of the benefits of each company. Ensure that a difficult time is not exacerbated by a financial burden by comparing life insurance rates today. You can always call us at 877-670-3560 if you have more questions or wish to speak with an agent directly.