How should I invest my late husbands life insurance policy?
My husband recently passed away and we are dealing with the grief. Fortunately, we had purchased some life insurance a few years back. I have a large sum of money that I need to put somewhere, but I don't know where. My husband was about 10 years from retirement and we have a few other accounts, but I could really use the advice.
Please accept my sincere condolences first of all. Secondly, the general rule for a grieving spouse is not to make any haste financial decision within the first 6 months for the fear of decisions made emotionally. If anyone tries to rush you, the polite answer is “I’ll get back to you soon as I have lots of other urgent decisions to make right now.” Having said that, it does not mean you should skip mortgage payments or credit card bills. Those should be paid on time no matter what. You may even want to set-up auto pays so that you can focus your energy and time on other financial or non-financial matters. Take the time to interview a financial planner, particularly a CFP®, through family/friends’ recommendations, or one you find on this platform as technology brings people closer more than ever. Once you choose the trusted CFP®, he/she will review your overall finance and design a plan that fits your short- and long-term goals, and manage the portfolios based on those premises. I wish you the best!
First of all, let me begin by offering my most sincere condolences to you and your family as you navigate the twists and turns of the grief that has come bum-rushing into your life as a result of the loss of your husband. I simply cannot even imagine what you must be going through right now. If it is of at least some small token of conciliatory encouragement, I am here to tell you that financially you are going to be okay. This is the moment that life insurance was designed for. Your husband took the time and energy necessary to ensure you will still be provided for in ways that he would have wanted you to be provided for, no matter what!
It is prudent of you to inquire as to the right place to put this money, because it is an incredibly important decision. I believe the ultimate decision of exactly where to put the money is one that should be made on the basis of recommendations from a financial professional such as myself, but only after a personalized comprehensive financial review is completed one-on-one (I call this a "Financial Needs Analysis"). There are a myriad number of ways to "configure" and tailor the options I'm listing below so it is very important to work with someone you feel you can trust (and who is obligated to act with your best interest first).
Some of the most common places to put the money include:
- Bank account (money market, CD, savings, checking, etc.) - low rate of return, low risk, earnings are typically taxable
- Stocks and Bonds - potentially greater rate of return, potentially greater risk, earnings are typically taxable and distributions are potentially taxable (if there are gains)
- Cash Value Life Insurance - potentially greater rate of return, potentially low risk, earnings are not typically taxable and distributions are not typically taxable
- Annuity - potentially greater rate of return, potentially low risk, earnings are not typically taxable, distributions are typically taxable
I also want to offer you some commentary on the key financial concepts to consider and also some questions to ask yourself that should help point you in the right direction when evaluating options in the aforementioned categories above.
1) Purpose - every dollar should "have a name on it." If you don't have a plan for what you will use this money for (e.g. living expenses, travel, children, etc.) then that is the most important thing you need to take some time to decide FIRST. A common goal is to replace income with the large sum of money. For example, invested properly, a life insurance check of $500,000 might yield 5% annually. This 5% annual figure would equate to $25,000 or a little over $2,000 a month of "income replacement." Deciding the purpose of these funds in your plan will have the biggest impact on ultimately what makes the most sense to do with this money. What are your priorities? What is currently missing from your plan outside of this new sum of money?
2) Time Horizon - how soon do you want, need, or plan to use some or all of this money? Most clients I work with find it easiest to think in 5-year "buckets." It will make sense to spread the money between each of those buckets. How much of this money do you want to put in each 5-year bucket?
3) Rate of Return - consider inflation on average is estimated to be somewhere between 2 to 3 percent every year. If you put this money in the bank, where the typical savings or checking account is well below this figure, inflation will actually cause you to "lose" money. You should have a goal of earning at least 4% on your savings to outpace inflation and actually grow the funds. What rate of return are you currently earning on your other accounts?
4) Taxes - remember that not all strategies are created equal when it comes to how you have to (or don't have to) pay taxes. Fortunately, a life insurance benefit is not taxable up-front. However, depending upon where you invest the money, you may be required to pay taxes on the growth of that account and/or the distributions from that account. Remember to factor in taxes when comparing fees on different investment options. Taxes in many cases are the highest "fee" that you'll have to pay on your money.
5) Risk - Remember the "paradox of money." If you lose a certain percentage on your investment, takes an even greater percentage gain to get back the money you lost. For example, if you invest $10,000 in something that could lose 50% in one time period, then you'd need to earn 100% on the remaining $5,000 to get back to the $10,000 you started with. A 100% gain to a 50% loss. How much potential loss are you really comfortable with? How much potential loss can you afford, based upon the purpose you have in mind for these funds?
Having worked with many individuals in this situation, you may feel all things are overwhelming. Trust me in that it will seem better over time! Your question cannot be addressed in a few paragraphs and do your question justice.
“Securing My Financial Well-Being.” is an eBook that I have written for people specifically in your situation. You may download it for free. I never know who does so and it is posted as a public resource. https://chamberlainfp.com/resources/widows-and-widowers
There are many good responses to your question that have been posted here. You may want to hire a CFP "Fee-Only" advisor near you to provide specific advice to your situation.
Please accept my deepest condolences and please take your time and not rush in making any financial decision.
I commend you for having purchased a life insurance a few years back, as you mentioned. When I have clients in a similar situation I always advise them taking some time to process it all. The most important decisions you already have made, which is to purchase a life insurance a few years back
I would definitely update the beneficiary information on the "other account" you mention. Not sure if your husband had a pension or not or any other retirement plan. If so please contact the Human Resource department of your late husband to make sure you update the necessary forms. Or at least find out what your options are.
I would highly recommend visiting an estate attorney to update your legal documents.
In the process take your time to interview a few advisors that are registered with the SEC. That would be my first question to ask the advisor.
As you are interviewing and looking for an advisor, find out if they would be willing to educate you on your options. Is financial and investment education part of their onboarding client process? Ask yourself, would you see yourself having a cup of coffee/tea with this person? As an advisor myself, I do the same thing when talking to a prospective client.
All in all the best thing to do is to take your time don’t rush in making any hasty decisions.
I wish you all the best and strength during this time.
My condolences on your loss to you and your family.
This has been, unfortunately, an area that we have helped many recent widows navigate. This first and foremost rule of thumb, do not do anything right away. You will want to make sure that you are not doing anything based upon the recent events and the the grief process you are working through.
This is an important time to find an advisor that you trust, particularly a fiduciary advisor, that will guide you through this process on your own time and will provide you with the time and space needed to work through your recent loss and not make any rash decisions. The advisor then should begin to work with you on developing a financial plan or amending your current plan if you have one to make sure you will be able to accomplish you financial and other goals. Hopefully this is not the first time you have ventured down the path of planning and had an excellent plan in place prior to your husbands passing.
The insurance company, in most cases, will either offer you a full payout which you should then deposit into accounts and make sure you are covered by FDIC insurance until you decide how you want to move forward. Another option they tend to offer is to make the payout in cash and they will hold for you in an interest bearing account that you can remove as or when needed. These would be the best options for you as you work through this process.
Make sure you get this plan in place for you and your family and only once this is completed and you are somewhat confident it is aligned with your long term goals and objectives should you start to think about putting an investment strategy together for the funds. This is something that takes everyone a differnt amount of time to work through and sometimes will depend on whether or not you already had a plan in place. We find that those that already had a plan in place have the ability to work through their revised plan more easily than those that never have had a plan before.
Just keep in mind, take the time you need to work through this and make sure you will be in the best position long term that you can be. Do not do anything rash or on the spur of the moment. Best of luck working through this and my condolences again.