How to Manage Life Insurance Payouts

The death benefit of a life insurance policy may have brought you a significant amount of income-tax-free cash, but you'll fritter it away unless you manage it properly.

Difficulty: Moderate

Instructions

Things You'll Need:

• Books On Financial Planning
• Investment Advice
• Financial Periodical Subscriptions
• Personal Financial Management Software
• Financial Advisers
• Personal Financial Software

1. If you haven't already done so, send the life insurance company a certified death certificate (not a photocopy) to receive the death benefit of the life insurance policy on the deceased.

2. Carefully study the options for payout presented to you by the insurance company.

3. Call the policyholder-services department of the insurance company and discuss any questions you have with a trained counselor.

4. First settle all final expenses and pay off all medical, hospital, and terminal-care costs of the deceased that are not covered by insurance.

5. If the amount left over is significant, consult with a financial professional regarding appropriate options for using, saving, and investing the money.

6. If the amount left over is relatively small, consider placing the money in a money market account with checking access.

7. Pay off all consumer debt.

8. Consider paying off any equity loans or mortgage, but discuss such procedures with a qualified tax adviser before doing so.

9. Before making any major purchases (car, furniture, travel, etc.), make sure that such expenditures will not adversely effect your long-term financial plans.

10. Invest with care and live prudently so that this amount of money will provide you with a long period of financial security and comfort.

Tips & Warnings

• Virtually all life insurance companies provide considerate and sensitive assistance in helping you decide how to receive the death benefit of one of their policies.
• The insurance company may provide you with checks to access the death benefit for immediate needs at low or no cost.
• Diversify your investments; well-managed mutual funds are a good way to do that.
• Keep a portion of your money in "cash" - some kind of liquid account - if you will need it within the next few years.
• Think of the principle as your "income generator," and withdraw interest or gains only if you need the money.
• A sizeable death benefit payment may catapult you into a higher tax bracket, so don't skimp on paying for sound tax advice from a qualified CPA.
• Legal advice and assistance may also be necessary following the death of a spouse or close relative, but be prudent and don't pay for more legal time than is necessary.
• Scam artists scour obituaries for new targets; beware of deals that sound too good to be true - they almost always are.
• Close family members and relatives can be a great comfort during bereavement, but they don't always make the best financial advisers.
• Never tie up money in accounts or investments that penalize you for early withdrawal if you might need that money within a short time.
• Putting all of your money into cash accounts or fixed-interest vehicles may not help you keep up with inflation, so consider putting at least some of your money in market-sensitive instruments like stocks, bonds, and mutual funds.