If you’ve recently been widowed, you have had to deal with an enormous amount of challenges: the emotions, the conversations, the decisions.
But with time, as grief loosens its grip on you, you should consider moving ahead with your life. There are many financial decisions to make, including what to do with your life insurance payout.
Assess Your Finances
Depending on the size of the life insurance policy payout, your options and alternatives could vary widely.
Let’s say you receive $250,000 tax-free cash from a life insurance policy that your spouse had established for your care. How would you handle this financial issue?
A good first step is understanding your financial situation. What assets and liabilities do you have? Maybe you own a home, have some savings and investments, two cars, and some miscellaneous personal property. But what do you owe? This is often the best place to start when evaluating your options for a life insurance check.
Let’s say you owe $150,000 on your home mortgage. You may want to consider using $150,000 of your $250,000 life insurance check to pay off your mortgage
While that takes away 60 percent of your available cash from life insurance, it also eliminates your mortgage and its associated payments, freeing your monthly cash flow and potentially saving you thousands of dollars on mortgage interest.
Also, there is a nonfinancial benefit to reducing or eliminating debt. You will likely feel peace of mind knowing your home is paid off.
It Doesn’t Always Make Sense to Pay Off Debt
What if you want to pay off your mortgage or other debt, but your total debt is equal to or greater than the amount of the life insurance check? If so, you need to consider how easily you can access your investments and savings.
It doesn’t make sense to spend your entire life insurance cash to reduce debt when you have little other liquid savings.
If you pay off your debt but have to use credit cards to get through the next few months, you’ll do more harm than good.
Instead, if your total debt meets or exceeds the amount of cash you’ve received from life insurance, don’t rush to pay off all your debt. Instead, start with your debt that has the highest interest rate, and hold on to some cash for living expenses going forward. This insurance then serves as an important emergency fund.
After you’ve addressed debt, consider other uses for this cash.
Following the passing of a spouse, many individuals want to remodel their homes. Meanwhile, some want to downsize to a smaller house. Yet others want to move to be closer to children and grandchildren. There’s nothing wrong with these choices, as long as you don’t outspend your budget.
Seek the advice of a real estate agent familiar with homes in your area so you don’t go overboard with home improvements.
This could make your home’s value out of line with other homes in your area. As a result, you could have a hard time getting a return on your remodel investment if you sell your home in the future.
Other potential uses for the life insurance check could include long-term care insurance, gifts to family or organizations, or setting funds aside for future travel.
Regardless of how you spend money from a life insurance policy, every widow or widower would benefit from making these decisions in the context of a personalized, comprehensive financial plan.
Once you’ve explored goals, values, and priorities, you can begin to make more informed choices that will work for your finances and lifestyle.
Mistakes to Avoid When Deciding What to Do With Your Payout
Widows and widowers face a multitude of decisions to make upon receiving life insurance benefits.
Ilene Davis, a certified financial planner and author, gives us the lowdown on some common mistakes widow(er)s make with their life insurance money:
- Not making a plan for the longer term, particularly if the money is supposed to provide for many years
- Listening to the advice of friends who may not know more than they do
- Not becoming financially knowledgeable enough to feel comfortable asking questions, and understanding answers, from a finance professional
- Budgeting ineffectively and misunderstanding the realistic amount of cash that you can spend per year
- Investing too conservatively. “I remember sadly watching widows get pushed into annuities with locked income only to find themselves, 10 to 20 years later, with lost purchasing power due to the increased cost of living,” Davis says
See What Life Insurance You Qualify For
In short, balancing life insurance benefits between everyday costs and careful investing can ensure long-term financial success.
The article What Widows Should Do With Life Insurance Money appeared first on Wealthy Single Mommy.
Additional reporting by Connor Beckett McInerney.