What to Do with Life Insurance Payout Proceeds

When someone close to us dies, one of the many things we have to deal with is dealing with their life insurance policy.

This often means receiving a lump sum payment which can be a lot to handle emotionally and financially.

Reading: How to invest life insurance money

It is important to remember that this money is meant to help you in your time of need and should not be wasted.

That means covering your pressing needs first, like funeral expenses, but also paying bills, getting rid of high-cost debt, and putting food on the table.

From then on, it means investigating how to invest life insurance proceeds for long-term financial security.

Here are some tips on how to invest life insurance proceeds wisely for both short-term and long-term needs.

what to do with life insurance money: the best investment options

what is the best thing to do with the proceeds from the life insurance payout?

couple reviewing financial documents together

After receiving a life insurance payment, your first priority should be to ensure that you have financial security in the near future. if possible, that means being debt free.

Set aside enough to cover your living expenses and other necessities, and create a fully funded emergency fund.

Once you’ve established financial security, make the remaining money grow and work for you by investing it wisely.

Life insurance policies don’t provide unlimited money, so you need to use the money they provide strategically.

Consider the following short-term needs before investing anything long-term.

1. pay off outstanding debts

Pay off any high-interest debt you have, like credit card debt. Eliminating your high-interest debt will save you money in the long run and prevent a significant amount of stress.

You don’t need to rush to pay off low-interest debt, like a mortgage. mortgages and low-interest student loans are considered “good debt,” while credit card debt and other personal loans are considered bad debt.

Even if you invest well, bad debt can add up faster than the return on your investment. low-interest debt can be paid off more slowly while keeping enough liquid money.

2. cover living expenses (save money to pay bills)

List all your living expenses, including rent, utilities, phone plans, internet, food, gas, and more.

You need enough money to keep the lights on, so estimate how much money is needed and have a little in reserve.

review past bank or credit card statements to remind yourself of any expenses you may be forgetting that occur less frequently but can drastically affect your finances.

Set money aside for these expenses before you spend them.

3. create an emergency fund in an interest bearing account

Depending on your financial situation and life circumstances, you’ll want to keep 3-6 (or more) months of living expenses in a savings account.

Tragic events sometimes happen in pairs or triplets and you never know when you might need an unexpected car repair, cut your work hours, or develop a health issue.

Keep your emergency fund in an interest-bearing account (think high-yield savings instead of checking) so it can grow as you sit and give you peace of mind (and hopefully not tap).

4. spend on necessities

Don’t feel guilty about spending death benefit funds on necessities like a roof or car repair. If your shoes are falling apart, go ahead and buy a new pair.

Just don’t spend your life insurance money on luxuries like a fancy watch if you want it to last.

money spent on a whim can run out quickly, especially if you’re not currently working and earning more.

5. whatever is left, consider investing

once you’ve made ends meet and established a solid financial foundation, consider investing the rest of the money so it can increase your net worth and provide you with a source of income for longer.

As we review the various options for investing the money you have left through a life insurance death benefit, feel free to consult financial professionals such as a financial planner.

We recommend a flat-rate financial planner if you prefer to go this route, because they are paid for their services, not commission or how much you invest with them.

how to invest your life insurance benefit

invest for income

1. bonuses

steps

Borrowers, such as businesses or the government, issue bonds to raise money to finance their operations. the bond works as a loan from investors.

Investors make money from bonds in two ways:

  1. hold until maturity and collect interest payments
  2. sell them at a higher price to someone else before maturity (plus collect interest payments along the way).
  3. Companies send interest payments on bonds at regular intervals in predictable amounts if they have fixed rates.

    While you want your life insurance earnings to grow to meet your long-term needs, holding bonds serves as a strong addition to investment portfolios for the income they provide.

    Related: Best Stock Portfolio Tracking Apps

    2. dividend stocks

    money in wallet medium Despite being associated with lower long-term returns than many other asset classes, dividend stocks still serve as a compelling option in some cases.

    dividends are regular cash payments issued to shareholders. When thinking about high-yield investments, these probably represent the most direct way to consider how an investment can pay you back.

    Because of this direct cash transfer, dividends also say a lot about a stock’s risk profile.

    When thinking about the risks involved with a dividend-paying (or non-dividend) stock, consider some of these factors:

    1. the dividend should be much more consistent and declared in a similar (or increasing) amount each quarter. Whether the stock goes up or down, the dividend arrives in your brokerage account the same way. Even if your stock underperforms for a while, these dividends should give you some value and make it easier to hold onto the stock during a market swoon or period of poor performance.
    2. dividends tend to cushion significant price declines, assuming economic circumstances do not warrant cutting dividends. Additionally, dividend payments remain fixed in terms of dollars per share, but dividend yields can increase when a share price falls. That measure represents the amount of money you can expect to get back based on the company’s current stock price in one year. As a stock’s price falls, it pays less for the same dividend, assuming the company doesn’t cut it.
    3. dividends represent stability for investors. Every period, the company needs to have a certain amount of cash for investors. This minimal level of cash flow off the balance sheet means companies need to be less risky and plan for this ongoing cost as part of their corporate strategy.
    4. As mentioned above, companies can, and some will, cut their dividends in times of economic uncertainty. while it’s usually one of the last items a company should cut, because it usually causes stocks to crash – people buy dividend stocks for their consistency.

      When the company threatens that consistency, investors tend to sell in favor of other investment options.

      Look for companies with a consistent track record of high yields and dividend growth. additionally, you want to monitor payment and debt-to-equity ratios.

      Payout ratios represent the amount of dividends paid relative to a company’s net income.

      As companies pay more of their net income in dividends, this represents a higher rate of dividend payout, but also a higher risk that the company may not be able to continue reinvesting in its business.

      When a company pays 50% or less of its net income in dividends, this generally represents a safer dividend investment. On top of this, it shows that a large portion of the company’s profits go towards paying dividends to investors.

      Debt-to-equity ratios show how much debt a company uses to finance its ongoing operations and investments. lower debt-to-equity ratios represent lower-risk companies, all things being equal.

      If a business fails to grow its revenue, the costs of debt can eat up an increasing portion of its cash flow, limiting the business’s ability to grow or even survive.

      Conservative investors tend to find more comfort in dividend stocks with good dividend growth, yields, payout ratios, and debt-to-income scores because they have less risk tolerance and are still rewarded for their choices. investment through regular dividend payments.

      related: how to research stocks before you buy [how to choose stocks]

      3. real estate

      real estate investing medium

      Real estate can be a great way to create a passive income. Some people choose to buy properties to rent to tenants.

      if you can afford to buy and manage short or long term rentals, it can be very profitable.

      However, there are ways to receive real estate money without such a substantial upfront cost and hassle.

      You could invest in crowdfunded real estate with companies like fundrise for non-accredited investors or yieldstreet for accredited investors.

      These platforms allow you to invest in properties such as apartments, commercial real estate, multi-family housing and more that you could not afford on your own. receive money from dividends, property sales, or both.

      An even easier way to make money with real estate is to buy real estate mutual funds (reits).

      A reit is a company that pools money from investors to buy and manage real estate. These are typically commercial or luxury properties.

      You can buy Reits on standard brokerage accounts or through private offerings like streitwise.

      investors receive dividends while holding their reits and can sell a reit at any time, possibly even for more than they originally paid.

      Another option is to buy real estate exchange-traded funds (ETFs). these funds invest the majority of their assets in equity securities and are passively managed.

      As with Reits, you receive dividends while holding the ETF and can sell it whenever you want, usually for more money.

      Note that for both types of investments, your dividends carry a variety of tax treatments, depending on the nature of the dividends paid.

      reit dividends can constitute three tax treatments:

      1. a tax-free capital return
      2. ordinary income
      3. capital gain
      4. See also: How To Switch Car Insurance in 5 Easy Steps (2022)

        Make sure you understand the tax implications of passive income tax rates and the rules that apply to reits.

        4. alternative investments

        man looking at tablet for information

        sometimes more “alternative” investments can have higher returns than standard investments.

        Don’t make your entire investment portfolio consist of alternative investments, but owning a few could help you if the stock market falls.

        One of the first investments that may have come to mind when you hear “alternative investments” could be cryptocurrency.

        However, at this point, cryptocurrencies have gone mainstream enough that they no longer feel very alternative. even non-fungible tokens, called nfts, have cracked the regular headlines we see.

        Nearly 70 million people around the world use blockchain wallets. Nowadays, it is possible to exchange cryptocurrencies in apps like robinhood.

        Another alternative investment that is gaining popularity is fine wine. According to investment consultant Knight Frank’s 2021 Wealth Report, fine wine has appreciated 127% over the last decade.

        wine is not strongly correlated to the stock market and can rise even during a recession. vint and vinovest are two popular wine investment platforms.

        Top-tier art, peer-to-peer lending and mining rights are just a few other alternative investments to consider.

        related: 11 best non-stock investments [alternatives to the stock market]

        5. consider an annuity

        evaluating a portfolio weighting

        Annuities provide a guaranteed stream of income, so you never have to worry about running out of money altogether.

        You can purchase annuities from an established and reputable insurance company, bank, independent broker, or other financial group.

        There are a variety of annuities to choose from. some are purchased by paying a lump sum, which you could easily do after receiving a death benefit. others can be purchased through a series of payments.

        You have to decide whether you want a fixed annuity with a constant interest rate or a variable annuity where the return depends on the performance of the underlying investments.

        Variable annuities have greater growth potential, but they also carry more risk because you may not receive as much money.

        Discuss annuity options with an insurance company, certified financial planner, or other qualified financial professional to decide which type of annuity might be best for you.

        While these can generate guaranteed income and payments, be sure to incorporate them as part of a broader financial planning effort and not as your entire investment strategy.

        In some cases, you might consider purchasing a permanent life insurance policy for its financial flexibility and ability to build tax-advantaged cash value over time.

        Related: Best Income-Generating Assets [Investing for Cash Flow]

        invest to grow

        woman on phone celebrating victory

        investing for growth means buying investments that focus on capital appreciation.

        You don’t get any money until you sell the investment, but if you hold onto it long enough, you have the potential to make a lot more money than you spent.

        If an insurance company issued you a lump sum, this could be a good option for you.

        You can store your growth investments in taxable brokerage accounts and tax-advantaged accounts to build long-term wealth. each account type has its own set of benefits.

        Retirement accounts are tax-deferred, meaning you don’t have to pay taxes until later, or are funded with after-tax money that grows tax-free.

        These tax benefits can save you a significant amount of money.

        taxable brokerage accounts, unlike retirement accounts, do not have contribution limits. you can invest all the money you want.

        Also, money in taxable brokerage accounts is liquid. you can sell stocks, index funds, and other liquid investments at any time.

        When you withdraw cash from sales, you pay no early withdrawal penalty.

        Consider placing portions of your life insurance death benefit in both types of accounts to build long-term wealth. Read about three of the best growth investments to hold below.

        related: the best commission-free stock trading apps & platforms

        6. growth stocks

        reviewing investment returns medium

        Investing is a way of setting aside money that will work for you so that you can reap the full benefits of your hard work in the future.

        Perhaps best said by legendary investor Warren Buffett, investing is “…the process of putting money out now in order to receive more money in the future.”

        Investing is all about putting your money to work and making it grow over time. growth stocks take this to another level by seeking capital appreciation as their primary investment objective.

        Growth stocks belong to growth-oriented companies, including industries such as technology, health care, and consumer goods.

        Growth companies traditionally work well for investors focused on the companies’ future potential.

        Growth companies focus on reinvestment and continuous innovation, which typically leads them to pay little or no dividend to shareholders, opting instead to invest most or all of their profits in expansion of your business.

        Some popular growth companies include firms like Google, Apple, and Tesla.

        Despite constantly reinvesting in the business, growth stocks are not without risk. companies can make poor decisions, markets overvalue stocks, and economic mishaps can derail companies with even the best prospects.

        However, growth stocks as a whole tend to provide the best return on investment over time if you can tolerate the volatility that comes with them.

        but, take risks with caution. While growing companies are more likely to provide an excellent return compared to other types of investments, you need to balance how much risk you’re willing to tolerate.

        Some companies grow at breakneck speed but have valuations to match. taking on too much risk can undermine a portfolio and rack up returns.

        You might consider using an award-winning service like motley idiot’s rule breakers to find high-growth stocks that have the potential to outperform the market.

        Take a look below at the details of this service and whether it could be a good addition to your investor toolkit.

        mixed rules investors: best for long-term investors looking for growth stocks

        motley fool rule breakers sign up

        • available: register here
        • Best for: growth investors who buy and hold
        • price: discounted rate the first year
        • motley fool rule breakers focuses on stocks that have huge growth potential in emerging industries. this service doesn’t look at what’s currently popular, but always looks for the next big stock.

          The service has six rules they must follow before making stock recommendations to subscribers:

          1. only invest in top dog companies in an emerging industry, as motley fool says: “it doesn’t matter if you’re the big player in floppy drives: the industry is falling apart.”
          2. the company must have a sustainable advantage
          3. company must have had strong price appreciation in the past
          4. the company needs to have a strong and competent management
          5. must have strong consumer appeal
          6. the financial media must overvalue the company
          7. As you can see, before recommending an action to users, rule breakers consider a number of factors. In short, the service looks primarily for well-managed companies in emerging industries with a sustainable advantage over competitors, among other factors.

            and its rules seem to pay off if its results have anything to say about it.

            Over the last 15 years, rule breakers have almost doubled the s&p 500, outperforming many leading money managers on wall street. its results speak for themselves and easily justify the affordable price of the first year.

            rb-performance-vs-sp-500-apr-2022

            what to expect from motley fool rule breakers:

            The service includes three main elements that you can expect to receive:

            1. a list of initial actions to start your rule-breaker journey with your “essential rule-breakers”
            2. 5 “best buy now” opportunities each month
            3. two new stock picks every month
            4. You will receive regular communications from the stock selection service with their analysis and reasons to buy stocks that meet your investment criteria.

              If you are not satisfied with the service during the first month, you can receive a full refund.

              Related: 13 Best Stocks & investment newsletters for alpha inbox

              7. constant eddies (blue chips)

              man on phone checking investments

              “steady whirlpool” investment focuses on blue chip companies with consistent results and long-term growth.

              offer reliable, high-conviction investment opportunities that you can trust to stay stable even when the going gets tough.

              These companies tend to do well because they have a strong economic moat or a competitive advantage they have built for themselves in a mature business.

              can build a moat in many ways, such as offering unique products and services, owning a patent or new technology, having a significant first-mover advantage in a market, or another compelling reason why this company it will probably continue to exist for years to come.

              See also: How far back does auto insurance look at driving record

              Constant eddies also tend to be the largest companies and therefore do not have great growth prospects. however, they can often do well in any economic environment.

              To the extent, these companies offer resiliency during market uncertainty and can rely on incredibly stable and recurring sources of income, giving investors a greater chance of achieving long records of positive returns and an investment that can withstand the passage of time.

              If you want help finding high-quality companies that deliver consistent returns over time, you may want to consider another silly motley service called a stock advisor.

              Below, we talk more about the service, including the types of companies the stock-picking service recommends and the returns they’ve achieved to date.

              Motley Stock Advisor: Best for Buying and Holding Investors

              motley fool stock advsior

              • available: register here
              • Ideal for: buy-and-hold growth investors
              • price: discounted rate the first year
              • The main difference between motley fool’s services is the type of stock pick recommendations.

                stock advisor mainly recommends well-established companies. Over a decade ago, they advised subscribers to buy companies like Netflix and Disney, which have been wildly successful.

                As a subscriber, you have access to their referral history and can see for yourself how they’ve fared over the years.

                According to its website, motley idiot stock advisor‘s stock underwriting service has returned 374% since its inception in February 2002 when calculated the average return of all your stock recommendations over the last 17 years.

                by comparison, the s&p 500 index only returned 125% over that same time period.

                sa-performance-vs-sp-500-apr2022

                what to expect from motley fool’s stock advisor:

                The Stock Advisor Service provides a wealth of valuable resources for subscribers.

                1. “starting stock” recommendations to serve as the foundation of your portfolio for new and experienced investors
                2. two new stock picks every month
                3. 10 “best buys now” chosen from more than 300 actions observed by the service
                4. invest resources with the Stock Picking Service Stock Recommendation Library
                5. access to the community of investors committed to outperforming the market and talking business
                6. The service has a discounted rate for the first year and has a 30-day membership refund period. Consider signing up as a stock advisor today.

                  Related: Best Stock Market Investing Research & analytics websites

                  8. index funds

                  investment software valuation

                  Index funds track a benchmark index, such as the S&P 500. Index funds are considered low risk because they are highly diversified.

                  You can usually get an S&P 500 index fund or other index for a low price and minimal fees. the expense ratio is low because the funds are passively managed.

                  You’re also saving money because index funds tend to be tax efficient. Because index funds have a low turnover rate, meaning account managers don’t buy and withdraw investments frequently, they are more tax efficient than actively managed funds.

                  Low turnover also means there are often no capital gains taxes to be paid by shareholders.

                  Perhaps most importantly, index funds typically have high returns that outperform most actively managed mutual funds. When choosing an index fund to invest in, be sure to compare expense ratios.

                  related: best stock trading & investing apps for beginners

                  related questions about investing life insurance proceeds

                  Do beneficiaries pay taxes on life insurance proceeds?

                  Beneficiaries generally do not have to pay taxes on the life insurance proceeds or death benefit they receive.

                  Life insurance benefits are generally not taxable, but interest received is considered taxable income. however, there are some exceptions.

                  If the insured person has a life insurance policy that pays cash dividends, the dividends do not count as income on the taxpayer’s return.

                  As long as the amount received does not exceed the net premiums paid on the policy, this passive income receives favorable tax treatment.

                  One of the exceptions is when life insurance ownership is transferred to someone else for cash or other valuable consideration.

                  That is, if you buy or sell the life insurance contract, like any other time a sale occurs, the taxes trickle in. They can apply under something the IRS calls the transfer for value rule.

                  When this happens, you can exclude the price you paid and any additional premiums you pay after your purchase.

                  For example, suppose you bought a $500,000 life insurance policy for $120,000. You paid $100,000 in premiums before the insured died and the death benefit was paid.

                  then you could exclude the costs you already paid, that is, $120,000 + $100,000 = $220,000, from your income.

                  To make things a bit more complicated, this exception has its own exceptions. irs publication 525 has more details you can review to see if your life insurance death benefit situation would be taxable.

                  How do you live off life insurance payments?

                  Even a high death benefit from a life insurance company can quickly disappear if you don’t manage the funds properly.

                  If you want to live on a death benefit, start by paying off high-interest debt because that will save you money in the long run.

                  Once you have enough money set aside for bills, necessities, and a fully funded emergency fund, invest the money so it can grow rather than continue to run dry.

                  You can choose to focus on investing for income so that you continually receive dividend payments.

                  Alternatively, you can also invest for growth and buy assets that are known to increase in value. later, you can sell these investments for a profit when you need more money.

                  Many people choose to do a combination of both. Basically, if you want to live on a death benefit, you have to make your money grow and work for you.

                  related: how to make money in shares [investing in the stock market]

                  Can life insurance proceeds be deposited into an IRA account?

                  man reviewing information on computer

                  once life insurance companies pay out a death benefit, the beneficiary can do whatever they want with the money.

                  You cannot directly reinvest life insurance proceeds, however you can use what you collect.

                  But remember, this money is generally tax-free and not earned income, and you can’t contribute more to an individual retirement account (IRA) than you did each year.

                  let’s say you and your partner were full-time workers. money was tight, so you hadn’t maxed out your retirement accounts that year, and you and your partner had top-tier life insurance policies.

                  After your partner died, you received a large lump-sum death benefit.

                  You could certainly use some of that money to max out an IRA as long as the amount doesn’t exceed the income you earned that year.

                  The life insurance payment is not earned income, the only type of money you can put into an IRA.

                  If you and your partner were married and filed a joint return, you could contribute even if you didn’t work that year, as long as the joint return showed enough earned income.

                  However, if you were unmarried and not working, the life insurance benefit is not earned income that could contribute.

                  related: best investments for roth ira accounts [high growth target]

                  is it better to take the lump sum death benefit for life insurance?

                  The vast majority of people choose to accept the lump sum payment. those who cannot opt ​​for a retained asset account.

                  Receiving a lump sum from the life insurance company allows you to quickly pay off any debt before more interest accrues.

                  It also gives the life insurance beneficiary the ability to invest money they don’t need right away so they can grow.

                  Some people do not trust themselves with substantial amounts of money from life insurance payments while they are grieving. others don’t trust themselves with significant amounts of money, period.

                  Anyone relieving pain with “retail therapy” might do better if the death benefit is paid into a retained asset account.

                  Retained asset accounts are controlled by a life insurance company and function like checking accounts.

                  The life insurance death benefit on the account earns a low interest rate and you can withdraw money with the checkbook provided.

                  As long as you are careful with your money, a lump sum payment is the best option.

                  how do I file a claim with the life insurance company for life insurance proceeds?

                  You cannot receive your life insurance death benefits until you file a life insurance claim. contact your agent or life insurance company directly.

                  Many people keep life insurance policies in a safe. If you can’t remember the name of the insurance company and can’t find the policy, check your bank statements.

                  When you contact the insurance agent, ask them to look up your life insurance policy to verify that you are listed as a beneficiary.

                  The insurance company can tell you where to find the claim form. You will need to complete that form and send them a certified copy of the death certificate.

                  be prepared to answer whether you want the money as a lump sum or in a retained asset account.

                  As long as there are no indications of fraud or other problems (for example, a term life insurance policy does not cover death from self-inflicted injuries), you should receive payment for life insurance coverage within a few days. or weeks.

                  See also: When should you drop comprehensive and collision auto insurance