Widow has a $1.2M life insurance ‘problem’
Sadly, in times of grief, financial mistakes often are made. That’s the nature of receiving a life insurance payout.
DEAR PETE: My husband just passed away at 43. I’m not quite sure what to do with the life insurance money I received. We have a $250,000 mortgage, two kids under age 12, and we don’t have much money in our retirement accounts. We have close to nothing saved for college. He had $1.2 million of life insurance, but I have no idea what to do with it. I’m terrified by the idea that I would waste it. If I’m being honest, I tend to blow through money. I’m probably the reason why we haven’t done a better job saving, and now I’m the one left to make these decisions. How do I not make an awful mistake? He’s been gone for three months, and the pressure is building to start making some decisions. — ELIZABETH
DEAR ELIZABETH: At the root level, life insurance is meant to provide flexibility. It allows you to catch your breath, fund incidental expenses related to your husband’s death and take the pressure off of an already stressful time. Fortunately, the life insurance money appears to have done just that. But as your gut appears to be telling you, it’s time to start employing amore permanent strategy.
One of the biggest mistakes you can make is to move forward without a permanent strategy. Sadly, in times of unthinkable grief, financial mistakes often are made. That’s the nature of receiving a life insurance payout. Immediately after the worst moment of your life, your accounts were flooded with money. It’s a strange problem, but a problem nonetheless. It’s not unusual for a widow or widower to simply bleed down the account over time, because they didn’t know what else to do. This mistake certainly is not purposeful, but it definitely is permanent.
TWO SCHOOLS OF THOUGHT
There are two primary paths you can take. You can either eliminate your expenses, or you could create an income stream to replace your husband’s income. I think most people’s gut instinct is to just pay off their debts.
There are no sweeping rules of thumb like “you should pay off your mortgage.” Eliminating debt can bring relief to a stressful situation, but the consumption of this power capital can create unintended consequences. If you’re worried about how you’d react to the increased cash flow that would come with eliminating your mortgage, then don’t pay it off.
MORE THAN JUST NUMBERS
You could calculate the optimal way to leverage the assets to create the perfect financial plan. But making a decision based solely on numbers could make things worse. You need to take the time to understand your behavior and tendencies, and then make your decision based on that. Since you struggle with spending issues, you need to take that into account.
If you were to create an income stream off of the death benefit, a quality investment adviser should be able to yield you no less than 3%, often taxfree. Therefore, $1.2million would generate at least $36,000 of tax-free income annually. That $3,000 monthly could be used to pay your mortgage or whatever other bills you have. All the while, your principal is relatively safe and secure. You will be able to pay off your mortgage over time with the income, and ideally still have the $1.2million for retirement, too.
SOCIAL SECURITY CAN HELP
One last note: Be sure to contact the Social Security administration and file for survivor benefits for your children. Young widows and widowers often forget to file for Social Security benefits on behalf of their children. Since your children are younger than 18, they can receive monthly benefits based on your husband’s average lifetime earnings. The benefits can be substantial and are a great way to fund a college education in the face of tough circumstances. This is especially important in your situation because you’re unlikely to receive student financial aid, based on the amount of non-retirement assets you nowhave.
If you play your cards right, you will be able to handle your monthly bills with the income you generate off of the death benefit, fund your kids’ education with Social Security survivor benefits and fund your retirement. And if you haven’t already, take the time to meet with a financial adviser or two. They will be able to do the math and calm your anxiety.