When a spouse suddenly dies, life insurance proceeds can swamp the survivor in amounts greater than what either of their incomes had ever produced.
It’s important to make key decisions about how best to handle the money: figuring out things like what debt should be paid off, how much to leave in liquid assets, and how to set up a budget.
The first thing to do: find an expert – and quickly. If you don’t have a friend or family member with a track record and credentials for handling finances, hire a Certified Financial Planner (CFP) skilled in handling life insurance proceeds.
Next, focus on immediate needs. Look at what has to be paid now, soon, and later. Things that need to be taken care of immediately: living expenses, medical bills, funeral arrangements and investigating Social Security. Usually, other things can wait.
If you have dependents under 18 living with you at home, you’re most likely due Social Security survivor’s benefits. If you’re over 60, and depending on how long you’ve been married, you may be entitled to widow’s or widower’s benefits from Social Security.
Four things to do with life insurance proceeds
- Pay off high-interest credit card debt.
- Understand your housing reality. You might have to sell your home if there isn’t enough money to sustain the lifestyle you’re used to.
- Review your retirement and, if applicable, college funds.
- Research your tax liability. Life insurance proceeds are usually not subject to federal income tax. Still, once you receive the money, you will be subject to taxes on any income it generates.
Three mistakes to avoid with life insurance proceeds
- Don’t think you deserve to start spending the money after what you’ve been through. Taking, say, a vacation should only happen after all the financial concerns have been addressed, high-interest debt has been paid and a budget (for now and in the future) has been considered.
- Don’t put the money into any investments that lock you in, or make costly investments. Specifically, watch out for large fees and commissions. And avoid putting life insurance proceeds into an irreversible fund you can’t access.
- Don’t rush to pay off all your debt. This leaves the money available to pay my living expenses and anything urgent that comes along.
For more information, please read:
Best Ways To Manage Life Insurance Proceeds After A Spouse Dies | Forbes