Widow has a $1.2M life in­sur­ance ‘prob­lem’

Chicago Sun-Times - - MONEY - Peter Dunn Peter Dunn is an au­thor, speaker and ra­dio host. Have a ques­tion? Email him at AskPete@pe­teth­e­p­lan­ner.com

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.


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.


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.


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.


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