Most of us have never had hundreds of thousands, or millions of dollars at once.
However, this is usually the situation when we lose a spouse that has thought enough of us to buy a life insurance policy.
What do you do with all of that money, how do you make sure you don’t squander it or put it in the wrong places?
There are some experts that can guide us through this process to make the most sound decisions at a time of sadness and confusion.
I asked over 30 of them a crucial question:
How should a surviving spouse invest their life insurance proceeds?
This guide will be a starting point for a much better understanding of how to invest a life insurance payout.
And let me tell you, the insights I received from these 30+ finance experts is some of the best advice you can get at such an emotional time in your life.
I’ve listed all of them below:
YOU DON'T NEED TO RUSH
The experts all seem to agree that when you lose someone, you need to get over your grief and not invest in anything for a while. Try to recover before making any financial moves.
The Experts On Investing Life Insurance Proceeds
Read each finance expert's advice on how to invest your life insurance proceeds:
"Where and how you decide to invest should take into consideration your age, your time horizon, income & expenses"
At first glance, the question "How should a surviving spouse invest their life insurance proceeds?" sounds simple, but as with many things in life, the best response is "it depends".
There is no perfect investment recommendation because every family situation is unique.
Your investment allocation or where and how you decide to invest should take into consideration your age, your time horizon, income & expenses, assets & liabilities tax bracket, goals, etc.
For example, when my Dad passed away in February 2015 after his 9 year struggle with Parkinson's disease, I helped my Mom complete the paperwork for his whole life insurance policies.
I gave my Mom the same advice that I give all of our clients.
Allow yourself the time and space to grieve.
Do not rush into an any investment decisions.
In fact, the best thing you can do at this time is refrain from making any investment decisions.
It is important to allow yourself to adjust to the uncertainty.
If appropriate, enlist the help and support of friends and family and work with a Certified Financial Planner who can help you develop a financial plan so that you understand your present situation.
If you understand your present situation, you can feel more comfortable and confident planning or the future.
Here are some strategies to help you chose the right wealth manager for you and your family.
"If you have the income to support it, start placing the stock fund and cash fund portfolio into tax-advantaged accounts"
First, take a year to think about it without doing anything.
You don't need to rush it.
Keep the proceeds in a savings account with interest.
Then, after major obligations like the mortgage have been paid off, take the remaining proceeds and split it into thirds: one in a low-cost stock index fund, one in a bond fund, and the other in cash in a savings account.
Moving forward, if you have the income to support it, start placing the stock fund and cash fund portfolio into tax-advantaged accounts using annual maximum limitations.
"Put the proceeds into a bank savings account, make sure not to exceed the FDIC insurance limits of $250,000 per depositor, per bank, per ownership category."
After losing a loved one, the first step is to wait.
Put the proceeds into a bank savings account, make sure not to exceed the FDIC insurance limits of $250,000 per depositor, per bank, per ownership category.
Pay off your debt.
Hold out a percent of the proceeds for emergencies (6-9 months living expenses).
Invest the rest in accord with your risk level and time horizon. If you lack investing expertise, you might want to hire a financial planner to help invest.
You might consider using a robo-advisor to help invest the proceeds.
You can find reviews of Personal Capital, Betterrment, Schwab and others here.
"Don't think there's a one size fits all."
Don't think there's a one size fits all.
Depends on Social Security benefits & other money.
Suggest working with an advisor @massmutual or @Prudential
"They should invest the only way one can invest: based on their values and goals."
No need to make this complicated, they should invest the only way one can invest: based on their values and goals.
Percent of People (in a recent survey by The Simple Dollar) that would spend a financial lump-sum paying off debt.
"Putting aside money for your children in a 529 or UTMA account to draw from in the future for college expenses can be a great idea."
Wipe out debt that may be dragging down your family income.
If there is any outstanding mortgage, auto loans, consumer debt, student loans, etc. that are on the family balance sheet, go ahead and wipe those out.
Putting aside money for your children in a 529 or UTMA account to draw from in the future for college expenses can be a great idea.
If the surviving spouse needs to supplement the deceased spouse's income, invest the remaining funds into a non-qualified brokerage account with interest bearing positions that are more conservative in nature.
While life insurance proceeds that are paid to a beneficiary are tax free, any interest received off investments of those proceeds are taxable.
Looking at state specific municipal bonds can be a great way to remain conservative with your investments and generate income for yourself that is exempt from those taxes.
For example, if you live in Georgia and buy municipal bonds that are Georgia-specific, all interest generated from those bonds are tax free at both the federal and state level.
"You'll probably need a portion of life insurance proceeds for near term expenses"
You'll probably need a portion of life insurance proceeds for near term expenses, but you should try to make sure that you have at least 50% left for investing purposes.
After that, maximize your 401k plan contributions if your employer offers such a program.
If more is left, open either a Roth or traditional IRA.
Another option is to invest in real estate, but you should really only undertake that strategy if you're well-versed in that area.
You could also beef up your own retirement portfolio, making sure to maintain a healthy mix of stocks and bonds, with the mix dependent upon your age.
A final option is to purchase either an annuity or life insurance policy with a cash-value aspect to it.
"The surviving spouse should seriously consider increasing the safe asset portion of the household’s investment portfolio."
It’s important, first of all, to assess whether this large insurance proceed along with a lost of one source of income changes the financial situation of the household, as it often does.
The surviving spouse should seriously consider increasing the safe asset portion of the household’s investment portfolio.
Once that decision is made and the new asset allocation mix is set, then just invest according to the plan.
We at MoneyNIng.com advocate low cost diversified index investing, so the mechanics of it all should be straight forward.
"In choosing investments they should consider the environment and society as well as their financial needs."
First, this depends on the survivor's age and circumstance.
If there is another generation to consider, after securing enough investments to match the survivor's risk/return profile, income and liquidity needs, they might consider paying off all debts so that is no longer a worry or burden in the future.
They should set aside travel or other wellness related money to help them heal from their loss and if they aspire to greater knowledge or education, they should invest in themselves by enrolling in courses that give them a sense of meaning and purpose.
Lastly, in choosing investments they should consider the environment and society as well as their financial needs.
This is the legacy they leave as an inspiration to others.
For further thoughts on money they could check out my book here.
"In determining how a surviving spouse should invest life insurance proceeds, I think it's important to first evaluate their specific situation."
In determining how a surviving spouse should invest life insurance proceeds, I think it's important to first evaluate their specific situation.
There really isn't a universal rule, in my opinion.
For example, if the surviving spouse is employed outside the home and has earned income sufficient to meet their current spending needs, the insurance proceeds could be invested with retirement in mind.
Conversely, a stay-at-home surviving spouse (for example, a parent at home with their children) would need the proceeds to provide replacement income.
In cases like this, the proceeds would need to be more conservatively invested.
For example, the beneficiary may benefit from one to two years of expenses left in cash, then laddering CD's for years three through six, then perhaps the balance of the proceeds could be invested in equities via a low-cost index fund.
As the years pass and the CD's mature, a portion of the equity position would move to new CD's to protect against a significant equity market correction at the wrong time.
Obviously, it's important to make sure enough life insurance is purchased in order to fund the investment pools if the surviving spouse would need to use the proceeds to cover their living expenses for an extended period of time.
"The short answer is that it depends on many factors, including the age and work status (employed, retired, etc) of the surviving spouse"
The short answer is that it depends on many factors, including the age and work status (employed, retired, etc) of the surviving spouse, and the amount of existing asset outside the life insurance proceeds.
For example, if the surviving spouse is 50 years old and makes enough money to afford his or her lifestyle, then the proceeds should probably be invested for growth to ensure that the balance is adequate for the 20-30 years of retirement down the road.
This type of portfolio might consist of a 60/40 split between stocks and bonds, split between various asset classes including US stocks, international developed countries, emerging markets, corporate bonds, and treasuries.
You can find exchange traded funds and mutual funds that will provide you access to these asset classes.
If however, the spouse is 80 years old and needs the life insurance proceeds to generate income now to pay for current expenses, he or she might consider investing in dividend paying stocks and also set up a bond ladder strategy.
The purpose of this type of portfolio would be to generate income and maintain principle.
A client's risk capacity is greatly reduced when assets are needed today.
Therefore, the portfolio should be much more conservative than that of the previously mentioned 50 year old spouse.
"It depends on his or her investing goals, time horizon, and risk tolerance"
There's no one answer to this question.
It depends on his or her investing goals, time horizon, and risk tolerance, to name a few.
As a general rule, you want to stick with low-cost, index funds with a tilt toward stocks over bonds.
Beyond that, it would depend on specific circumstances.
"Life insurance is designed to help you cover living expenses, so a surviving spouse shouldn't just blow the money on fun purchases and trips."
Life insurance is designed to help you cover living expenses, so a surviving spouse shouldn't just blow the money on fun purchases and trips.
After paying for funeral costs, the best option is to invest the funds conservatively to last as long as possible.
Following the Warren Buffett plan he suggested for his wife when he passes away, you should invest 90% in a low-fee S&P 500 index fund and 10% in a short-term bond fund.
If you need cash from the investments immediately and over time, a low-cost dividend fund might make more sense.
Whatever you do, don't spend too much too quickly.
Do not rush and make dramatic, lavish lifestyle changes.
The life insurance proceeds you received might have to last a long time, so be thoughtful about every dollar you spend to ensure it lasts a very long time.
"With regards to investing, many times the death of the insured has changed the survivor's need and ability to take risk"
A life insurance payout, like any other windfall, should be sat on for a few months while a new financial plan is drawn up by the investor, with or without an advisor.
There are times it should be used to pay off debt, times when it should beef up an emergency fund, times when it should be invested for the future, and times it should be spent.
With regards to investing, many times the death of the insured has changed the survivor's need and ability to take risk, so it is likely that a change in asset allocation is warranted.
"Interview fee-only CFPs and hire the one who you connect with the most"
The first thing I recommend is to pay off any high interest rate debt, max out your retirement accounts for the year, and then don't make any other big decisions for at least 6 months.
There's a great book called "Sudden Money" by, Susan Bradley that I highly recommend for anyone who receives an insurance settlement, lottery winnings, or a large inheritance.
During those 6 months, interview fee-only CFPs and hire the one who you connect with the most to help you navigate through your money more effectively.
"One of the biggest factors will be the surviving spouse's age to see how long to plan for"
As it is commonly said in the industry, the answer is it depends.
One of the biggest factors will be the surviving spouse's age to see how long to plan for, but then the annual income need (i.e. gap to fulfill annual living expenses) from the life insurance proceeds will need to be determined as well.
On a high level, once the withdrawal rate is calculated in conjunction with other assets and financial goals, the investment strategy can be recommended in order to keep up with inflation and to support the surviving spouse's financial needs over the duration of the rest of his/her life.
The proposed investment strategy should align with the surviving spouse's risk tolerance, to ensure consistency of the strategy long-term.
"He/she should take their time to cope with their loss and then sit down and look at their overall financial situation"
Each surviving spouse's situation is different so there is no "one size fits all" answer.
He/she should take their time to cope with their loss and then sit down and look at their overall financial situation and invest the proceeds accordingly.
A young widow/widower with minor children will have different financial needs than an older surviving spouse in or near retirement.
"The survivor might have enough income and therefore may want to tuck it away for retirement or education"
A surviving spouse should invest the money as most appropriate to their particular situation.
The survivor might have enough income and therefore may want to tuck it away for retirement or education.
On the other hand, the survivor may not have enough income once their spouse dies.
What is critical is that the survivor revisit their financial plan and understand what they need and how much income those proceeds can really provide.
For example, $500,000 may seem like a lot of money - and it is.
But if you receive that as a death benefit and withdraw $75,000 a year to make up for your deceased spouse's lost income, that $500k will be gone in less than 10 years.
So you have to figure what you need the money to do for the survivor and over what period of time.
If you need the money to provide more benefits than it can reasonably expect to deliver, please revisit your financial plan.
All that said, for most people, if you want this pot of money to provide long-term benefits, it should be invested in long-term investments.
That means, for most people, at least some portion should be invested for growth. Here's a post that goes into retirement income in greater detail.
So the most important take-away is - there is NO ONE RIGHT ANSWER.
It depends on each situation and understanding that situation is far more important.
You can't find the right investment unless you understand what neighborhood to look in.
"The first thing you want to do when you receive a life insurance payout is part it in a safe, secure place"
The first thing you want to do when you receive a life insurance payout is park it in a safe, secure place like Treasury Bills or a Money Market Fund where there's little risk of loss (or gain).
Then do absolutely nothing with it.
Just sit on it.
The reason this is a critically important first action is because you must emotionally take possession of the money before you invest it, and that takes time.
It must become "your money" so that if it's lost you feel a sense of loss.
You don't want to invest life insurance proceeds right after receiving the check because you'll be prone to "easy come, easy go" investment mistakes.
This will be difficult to do because the investment industry has been remarkably effective at making you believe you must be invested at all times.
However, that's biased advice resulting from the fact that they only make their fees when your invested but make nothing off you sitting in cash equivalents.
The reality is inflation won't destroy your nest egg in a year or two of sitting, and in the meantime you can develop your investment knowledge and do some research so that you're emotionally ready to invest the money when the right opportunity presents itself.
"The insurance proceeds need to be invested into safe investment vehicles"
When a surviving spouse receives a life insurance benefit, it should be invested into very low risk mutual funds, CDs, or money market accounts.
This money is presumably to be used to pay for items such as the home the surviving family lives in, college tuition for children, or other more immediate expenses.
With that in mind, the insurance proceeds need to be invested into safe investment vehicles, which will preserve the principle and earn interest
"Personally, I would simply index the portfolio with globally diversified ETFs for the long term"
Hopefully, there is a plan on what to do with the proceeds prior to the windfall payout.
For some, insurance is for paying off debt (mortgage etc) so that there is less financial burden on the family.
For others, the insurance benefit is to cover lost cash flow into the household for a certain period of time.
If it's a short time frame, then I would use low-risk high-interest savings accounts or other fixed income tools.
If the lump sum is meant to be invested over the long term, I would highly suggest working with a fee-only financial planner so that the windfall can be invested with the proper asset allocation to meet the clients financial goals.
Personally, I would simply index the portfolio with globally diversified ETFs for the long term.
"In the wake of an extreme emotional blow, minimizing the stress of making complicated financial decisions can be priceless"
Unfortunately, there is no one size fits all solution for everyday investors, and the same holds true when deciding what to do with an insurance inheritance.
The recipient would need to determine their risk threshold, time horizon, current financial positioning, and investment objectives (which might include leaving behind money for family in addition to providing for their own living, for example) before a proper investment solution can be determined.
If unsure about making this decision independently, I would suggest the beneficiary seek a reputable and trustworthy source for guidance.
Yes, I realize that response is rather boring and boilerplate, so I will tack on something more tangible.
I have experienced that when steady cash flow is the only requirement, and the recipient wants a simplified investment solution, a managed payout fund (such as Vanguard's VPGDX) can work quite nicely.
In the wake of an extreme emotional blow, minimizing the stress of making complicated financial decisions can be priceless.
"Generally speaking, investing life insurance proceeds should not really be approached any differently than other investments."
How a surviving spouse should invest his or her life insurance proceeds is going to depend on his or her age, age of children (if any), goals, current lifestyle, risk tolerance, and employment situation.
Generally speaking, investing life insurance proceeds should not really be approached any differently than other investments.
Creating a diversified and tax-efficient portfolio using an appropriate risk tolerance and time horizon for each goal should be the starting point.
Challenges could arise when we are dealing with a surviving spouse who chooses not to or is unable to work and has young children.
As the family will not only have to focus on retirement and education planning, they may need to strategically invest the life insurance proceeds and other assets to provide a consistent income stream each year in order to maintain the family's current lifestyle; otherwise, the surviving spouse may have to re-enter or enter for the first time into the workplace.
"I'd follow the approach of investing in low-cost, broad-based index funds to keep track with the market"
Investing life insurance proceeds largely depends on the needs of the surviving spouse/other family members.
Don't be in a rush, but look at your needs - both short and long-term.
Depending on the amount of the proceeds, and other finances, you may want to speak with a professional to get insight on your options.
If all else fails, I'd follow the approach of investing in low-cost, broad-based index funds to keep track with the market.
"In most cases repaying any outstanding debts (including auto loans and mortgages) is a good idea."
How should a surviving spouse invest insurance proceeds?
That's a very good question that doesn't have a 'one size fits all' answer.
It would depend largely on the surviving spouse's age and financial situation.
In most cases repaying any outstanding debts (including auto loans and mortgages) is a good idea.
Debt almost always costs more in interest than you'll earn on any investment.
If the survivor is elderly they may want to invest in something that will provide income for the rest of their lives.
Annuities are a possibility, but remember to carefully check out fees and sales charges.
If the survivor is younger, say under 75, they might want to choose either a balance or a stock fund.
Life expectancy is in the mid-80s now and is increasing.
People in their 60s and 70s need to plan for another 20 to 30 years.
That means taking inflation into account.
Ultimately the survivor must integrate the insurance proceeds with the rest of their financial and estate plan.
In most casees that probably means talking with a professional who knows their circumstances and other investments.
"The first step is to get the payout from the life insurance company rather than leaving it with them on account"
The first step is to get the payout from the life insurance company rather than leaving it with them on account.
Any proceeds should then be placed into a savings account for 3-6 months so that they have time to process their loss and return to a routine.
Depending on their level of financial expertise, they should either invest according to their strategy.
And if they been using a financial advisor, consult with them to see what's appropriate.
If they have not been using a financial advisor, they should seek out a qualified financial advisor who can help them develop a sound overall strategy rather than just buying a specific product.
Bottom line, take some time to breathe, there is no rush.
"Before you decide to pay off your mortgage, or go on a shopping spree, you'll want to make sure your foundation is in check."
When deciding how to invest your life insurance proceeds it's really important to take an inventory of where you're at financially and what your life will look like as the serving spouse.
Before you decide to pay off your mortgage, or go on a shopping spree, you'll want to make sure your foundation is in check.
Start by asking yourself some questions: what are my monthly financial obligations, do I have a strong emergency fund with 3-6 months worth of expenses saved, what does my debt situation look like, etc.
From there, you can start to create a plan around your proceeds.
While there is no one-size-fits-all answer, investing your proceeds and living off the interest is often a smart way to keep that money growing so you can achieve many money goals in the future.
"Setting up an emergency fund, paying off debt and/or the mortgage are all major components to building financial longevity."
How to invest insurance proceeds is contingent on the surviving spouse's existing financial condition and age.
She may need to do some house cleaning first before moving to investing in general.
Setting up an emergency fund, paying off debt and/or the mortgage are all major components to building financial longevity.
A strong foundation is the key to wealth.
He would also have to consider the future well-being of his kids (if they have any).
Some of those insurance proceeds may need to be invested in 529 plans or some other investment vehicle to secure the children's future endeavors.
After the previous mentioned instances have been fulfilled, I would suggest investing in index funds with emphasis on overall asset allocation.
It all depends on the age of the surviving spouse.
Ideally she would want more bond funds if nearing retirement for less volatility, but if younger, she would want the the opposite.
More stocks versus bonds for growth purposes.
"Depends on their age, objectives, and monthly cost of living"
Depends on their age, objectives, and monthly cost of living.
On the "safe" side of the spectrum of options, if it provides sufficient income for living expenses, might be to invest in muni bonds -- because then the surviving spouse doesn't have to worry about taxes.
However, if you're in a state without state income tax that can be a waste.
"They can calculate their monthly budget and invest the corpus in liquid funds for the expenses"
Consult to a Financial Planner and invest wisely as per the fund need.
They can calculate their monthly budget and invest the corpus in liquid funds for the expenses.
And with the left proceeds they can invest in their child's education/marriage (if any exist).
They can invest in a Monthly Income Plan and avail the funds as per the need along with a health insurance plan for themselves.
"Survey data from the federal reserve found that 1/3 of people who received an inheritance had negative savings with two years."
When a loved one is lost, it's a good idea to not make any hasty financial decisions and do something you might regret later.
Survey data from the federal reserve found that 1/3 of people who received an inheritance had negative savings with two years.
Put the money in an interest bearing account for a few months and take some time to grieve.
Then be ready to make a plan.
Your course of action will highly depend on the surviving spouse's current living situation.
If they're a stay at home parent with no income, their needs are going to be more immediate and some of the money will likely need to remain liquid, at least for a couple years worth of expenses.
After that you could consider putting a couple years worth of it in CDs, and then the rest in equities.
The surviving spouse will likely also want to sit down with a financial planner to help them come up with a game plan for their money, and for their spending moving forward.
For those who aren't dependent on the insurance benefit, if they're still relatively young I'd think about putting a decent amount of the money into index funds, with a smaller amount of it cash depending on their level of risk that they want to take.
What it comes down to is this.
Take some time to grieve then sit down and make a financial plan that is tailored to your situation.
"Placing the money in an insured, and interest-bearing account is a great first step."
Everyone's personal situation will be different, but generally, don't make any rash decision when receiving a lump sum of money from a life insurance policy.
Take time to grieve, and get your life situated first.
Placing the money in an insured, and interest-bearing account is a great first step.
Once you are ready, determine what you will use the money for, possibly some immediate expenses or take a more long term approach and invest in low-cost mutual funds for your future.
"Diversify your assets with a robo advisor."
Diversify your assets with a robo advisor.
When you receive life insurance proceeds, the best thing to do with it is to invest it and generate more income.
However, it's not enough to simply dump it into an ETF or mutual fund.
Instead, you should look into robo advisors such as Wealthfront and Betterment.
These advisors ask you questions about your risk and your investment goals, and then come up with a unique portfolio that suits your desired financial outcomes.
The portfolio has debt, equity, commodities, cash, and more, and it is automatically rebalanced for you.
"The actual "how to..." will come naturally by building a plan."
I think there is one thing that should be done immediately: Review and update your financial plan with a trusted advisor.
A competent third party will help the survivor through the immediate financial confusion and prioritize the long-term requirements.
The actual "how to..." will come naturally by building a plan.
Priorities are completely different based on the role of who has passed.
The loss of the primary income for a family with school-aged children will have different needs than the loss of a retired spouse.
But, in both situations, by updating the financial plan the answer will let itself be known.
"The fact that a life insurance policy is the source of the money is not relevant to the question of how it should be invested."
The fact that a life insurance policy is the source of the money is not relevant to the question of how it should be invested.
The proceeds should be invested exactly the same way as any other money: based on their individual goals and values, and in accordance with their overall financial plan.
Given that losing a spouse has such a tremendous impact on your life, emotions, and financial situation, I would recommend waiting a period of time before making any big decisions.
Go ahead and pay for a memorial service in accordance with the wishes of the deceased, and pay off any high-interest debt that you may have, but leave the rest of it in a savings account until you are past the initial shock and grief.
The opportunity cost of not investing that money for 6-12 months is much less significant than the possibility of making poor decisions while in a tough emotional state.
Be sure to hold the money in an FDIC-insured savings account, do not use the "retained asset" accounts that some insurers offer at a paltry interest rate without FDIC coverage.
On a related note, I would also suggest being thorough in your search for any other life insurance policies that your spouse may have had.
There are currently tens of billions of dollars being held by insurance companies who have barely made any effort to find rightful beneficiaries.
There are even some quite egregious examples such as insurance companies stopping payments for an annuity upon being notified of the annuitant's death, but then making no effort to find beneficiary for a life insurance policy that they also held.
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