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What to do with a one-time life insurance policy

As the primary beneficiary, it can feel overwhelming to receive such a large sum of money at once. You may often wonder what to do with a one-time life insurance payment. Use these tips to manage a life insurance payment.

26 May 2022 | Life insurance

A life insurance payment can be a real lifeline for any surviving partner or family trying to make ends meet financially after the loss of a loved one.

Life insurance companies usually offer a variety of payment options for life insurance compensation in the event of death: a lump sum, an annuity, installment agreements and other similar structured payment plans, although this may vary depending on the company and insurance. The standard payment option for most insurances is a lump sum of the death benefit.

Getting such a large sum of money at once can feel overwhelming. This is why it is so important to take the time to understand the best ways to handle a one-time payment of a life insurance policy. These tips from financial experts can help.

In this article:

Do not be in a hurry to make big financial decisions

The best thing you can do when you get a one-time payment of life insurance is to stick to that money for several months before making any significant financial decisions.

“If you’ve received a life insurance payment, this is a time when it can make sense to just leave the money in your account,” said RJ Weiss, a CFP® professional and founder of The Personal Ways to Wealth Education Website. “Your goal is to make a rational, well-educated decision, not an emotional one.”

Keeping a one-time payment in cash allows you to cover bills and other urgent financial needs in the months following the loss of a loved one. Just do not leave the money in a checking account, says Daniel Kopp, a free financial planner and founder of Wise Stewardship Financial Planning, which specializes in serving widows, widowers and service members.

Consider a high-yield savings account

Instead, you can consider putting the payment into a high-yield savings account to get interest on the balance. If you received a large payout, you may need to spread the money over several savings accounts. This is because the deposit insurance from the Federal Deposit Insurance Corporation only covers $ 250,000 per depositor, per FDIC-insured bank.

After making sure you have covered all immediate expenses, your first priority is to use part of a life insurance payment to build an emergency fund, says Kopp. This will give you a cash reserve so that you will not be derailed by the unexpected, he states.

Financial professionals usually recommend having enough in an emergency fund to cover three to six months of expenses. If the life insurance income is stored in a high-yield savings account, it can earn interest and be easily accessible if and when emergencies arise.

If the loved one you lost was the breadwinner, you may want to set aside more in an emergency fund to stay afloat financially when applying for a job. You can simulate a monthly paycheck until you receive your own income by setting up automatic transfers from your savings account to your checking account.

Pay off high interest debt

If you have high interest debt like credit card debt, you can use a lump sum life insurance payment to eliminate that debt, Kopp says. By paying off what you owe, you free up more money in your budget each month to cover other bills and to get a more economical pillow.

Are you wondering if you should pay off a mortgage with a life insurance policy? It depends on your situation, says Kopp. You may be considering using life insurance proceeds to pay off your mortgage if the thought of the big monthly payment keeps you awake at night. You may also want to consider the trade-offs with other approaches, such as savings accounts or investment instruments. Working with a financial expert can help.

Find a reliable financial advisor

Finding out how to invest a lump sum of life insurance can be difficult on its own. Therefore, it may be wise to hire a financial planner. “Having the third party go through the options will help,” says Kopp. When he lost his wife in 2017, Kopp says he hired a financial planner “to be that rational third party to help me see the flaws in 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 shop steward – a professional who is legally and ethically obliged to act in the client’s best interests. You can find a financial advisor through organizations such as NAPFA, XY Planning Network and Fee-Only Network.

Kopp suggests that you work with a planner who specializes in helping widows or widowers. “This has to be someone who can relate emotionally,” he says. Take the time to interview several counselors to find the best fit for your circumstances.

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About Cameron Huddleston

Cameron Huddleston is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. She is an award-winning journalist with more than 18 years of experience writing about personal finance. Her work has appeared in Kiplinger’s Personal Finance, Business Insider, Chicago Tribune, Forbes, MSN, Yahoo and many more print and online publications. US News & World Report named Cameron one of the top personal finance experts to follow on Twitter, and AOL Daily Finance named me one of the top 20 personal finance influencers to follow on Twitter. She has appeared on CNBC, MSNBC, CNN and “Fox & Friends” and has been a guest on ABC News Radio, Wall Street Journal Radio, NPR and more than 30 podcasts. Cameron has also been interviewed and quoted as an expert in The New York Times, Chicago Tribune, BBC.com, MarketWatch and more.

Read more by Cameron Huddleston

Our editorial policy

Haven Life is a customer-centric life insurance agency supported and wholly owned by the Massachusetts Mutual Life Insurance Company (MassMutual). We believe that it can be refreshingly easy to navigate decisions about life insurance, your personal finances and overall well-being.

Our editorial policy

Haven Life is a customer-centric life insurance agency supported and wholly owned by the Massachusetts Mutual Life Insurance Company (MassMutual). We believe that it can be refreshingly easy to navigate decisions about life insurance, your personal finances and overall well-being.

Our content is created for educational purposes only. Haven Life does not support the companies, products, services or strategies discussed here, but we hope they can make your life a little less difficult if they suit your situation.

Haven Life is not authorized to provide tax, legal or investment advice. This material is not intended to provide and should not be used for tax, legal or investment advice. Individuals are encouraged to seek advice from their own tax or legal adviser.

Our revelations

Haven Term is a life insurance policy (DTC and ICC17DTC in certain states, including NC) issued by the Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and is offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by CM Life Insurance Company, Enfield, CT 06082. Police and driver form numbers and features may vary by state and may not be available in all states. Our agency license number in California is OK71922 and in Arkansas 100139527.

MassMutual is ranked by AM Best Company as A ++ (Superior; Top Category of 15). The grade is valid from 1 April 2020 and may change. MassMutual has received various ratings from other credit rating agencies.

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