If you’re on the receiving end of a life insurance payout, you may be wondering what to do with the money. Losing a loved one is an emotional ordeal for most people and adding money to the equation does not help.
The idea behind a life insurance policy is to provide a safety net for dependents who may need the funds in case the person passes away. If the worst comes to pass, getting the payout and figuring out what to do with the funds is an important step.
Here are the steps you should take if you’re on the receiving end of a life insurance policy payout:
Call a Financial Time Out
One of the most important steps is to call a financial timeout. Grief can cause us to do crazy things such as going on a shopping spree or gambling. Take a step back and don’t make any decisions until you feel more in control of your emotions.
Enlisting the help of a loved one during this time of grief can be invaluable. We all need someone to lean on who can help us through the rough patches. Be it your sibling or a close friend, ask for help from a person who’s removed enough from the situation to offer a clear head and counsel you.
This person can help you in contacting the insurance company and getting information on next steps with getting your life insurance payout. There will be documents you’ll need to provide and paperwork to fill out.
If the person who passed away was the primary breadwinner for the family and handled the finances, this step is particularly important. You want the help of someone who knows how to handle finances and can help guide you through the process.
Review All Options
Even the largest windfall can quickly dwindle if not managed correctly. This is why it’s important to consider all options before any money hits your bank account.
Depending on the type of policy you have, you may have several different choices for getting your money:
- Life Income: With this option, you can receive guaranteed, fixed monthly payments for the rest of your life. How much you get is determined by your age and gender. Keep in mind that a beneficiary won’t be able to continue receiving the funds after your death. The payments will cease once you pass away.
- Life Income Within a Certain Period: With this option, you can receive a guaranteed portion of the death benefit for life or for a certain period of time such as 10, 20 or 30 years – whichever is longer. Longer periods mean lower annual payouts.
- Joint and Survivor Life Income: With this option, you can have a guaranteed amount of income paid out over two or more lives – yours and those of another beneficiary. The payments will be guaranteed until the last beneficiary dies.
- Interest Income: This option allows you to leave all or part of the death benefits with the insurance company to earn interest. In turn, you can have that interest paid out to you monthly, quarterly, semi-annually or annually. You need to find out if the money will earn a fixed or variable interest rate. For variable interest rates, find out the minimum and maximum interest rates you could earn on your investment. There may be certain conditions that allow you to withdraw up to a specific amount of principal.
- Specific Income: This option gives you the flexibility to decide how much money you want to receive and how often (monthly, quarterly, etc.). The benefits will continue until the policy is exhausted. You can also name a secondary beneficiary to receive the remainder of the payments if you die before then.
Consult with a Professional
Before you select a payout option, you need to consider your financial needs in the short term – and in the long term. You’ll also need to plan for any taxes you’ll have to pay on the insurance benefits.
One of the best things you can do is consult with a professional. They can help you determine your potential tax bill and figure out the best way to receive your payout.
In addition, they can help you get the rest of your finances in order and advise you on the best course of action. This is especially helpful if the person who passed away was primarily responsible for your finances.
Having a neutral third party who’s familiar with life insurance payouts can be invaluable in such a stressful time. They can help you decide if you should add more funds to your retirement accounts, invest some money into your children’s college funds, or pay down debt.
The Bottom Line
Life insurance payouts are there to help you pay for necessities when a loved one passes away. However, this is a stressful time and there are many options for what you can do with the funds. Lean on a trusted friend or family member who can help you manage your grief and your finances.
Getting a professional on board can be very helpful since you’ll face a number of financial decisions – many new and unfamiliar. Getting the right people on your team can be the difference between thriving and just surviving after experiencing a loss.
Bio: This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth and NextGen Life Insurance. You can learn more about Clint at the website NextGen Wealth.