When a person loses a loved one and is the beneficiary of a large chunk of life insurance money, the handling of that money might take a back seat to dealing with grief and loss. A death in the family – especially if the person who died is a primary earner – will likely result in some financial upheaval, but it will also be emotionally devastating, and survivors may be ill-equipped to make major decisions about what to do with the life insurance money they receive, especially if it’s a large sum.
A recent NPR article details how the families of servicemen and women killed in battle are being given “checkbooks” that represent the value of the fallen soldier’s life insurance policy. The life insurance companies are keeping the money in their own investment accounts, earning several percent interest, and paying 0.5% interest to the policy beneficiaries. The carriers point out that if they didn’t offer this option for the families to earn half a percent interest on the money, it might just sit somewhere, earning no interest at all. I suppose that’s true, but families should be aware that they have lots of options, and that taking the default choice of letting the life insurance company handle the money for them (and keep a good chunk of the interest earned) might not be the best one.
Trying to figure out what to do with a large chunk of money from a life insurance settlement can be difficult in the best of times, and nearly impossible when a person is grieving. It makes much more sense to sketch out the details of what your family would do with any life insurance money before that situation arises. If you don’t die while your life insurance policy is in force, the plan won’t ever be needed. But if you do pass away and leave your beneficiaries with life insurance money, it will make things a lot easier for them if the family has a plan in place and they can simply use the money as planned, without having to make decisions while grieving. And it will make it much less likely that the surviving family members will be duped by unscrupulous “advisors” or companies that don’t have the beneficiaries’ best interests in mind.
A financial advisor can provide advice, but there are also lots of financial advice websites that can provide guidance for people trying to figure out what to do with any sort of windfall, including life insurance proceeds. Planning now for what you might do with life insurance money will likely make things easier if and when you find yourself receiving life insurance following the death of a loved one.