Life Insurance Payout: Investing For Security And Growth

The sudden influx of a large amount of money from a life insurance payout can present challenging decisions. Before deciding whether to save, spend or invest, it's important to carefully review your financial situation and objectives. One of the best things to do when you receive a life insurance payout is to hold on to the money for several months before making any significant financial decisions. This will help you make a rational, educated decision, rather than an emotional one.

Pay off high-interest debt

Paying Off High-Interest Debt with a Life Insurance Payout

Receiving a life insurance payout can be emotionally and financially challenging. It is essential to weigh your options carefully and avoid making rushed decisions. Paying off high-interest debt is one of the best ways to utilise a life insurance payout. Here are some reasons why:

Save Money in the Long Run

High-interest debt, such as credit card debt, can accumulate quickly and become a significant financial burden. By using your life insurance payout to pay off such debt, you will save money in the long run. The interest on credit cards can be extremely high, often around 20% or more. By eliminating this debt, you will prevent unnecessary expenses and keep more of your money in your pocket.

Reduce Financial Stress

High-interest debt can be a constant source of stress, affecting your mental health and overall well-being. By paying off this debt, you will reduce your financial stress and gain peace of mind. This is especially important when dealing with the emotional weight of losing a loved one.

Improve Your Credit Score

High-interest debt, such as credit card balances, can negatively impact your credit score. By paying off this debt, you will improve your creditworthiness and increase your chances of securing loans or favourable interest rates in the future.

Free Up Disposable Income

By eliminating high-interest debt, you will free up more of your disposable income. This extra money can be redirected towards other financial goals, such as saving for retirement, investing, or building an emergency fund.

Achieve Financial Stability

Paying off high-interest debt will put you on a path towards financial stability and security. It will reduce your monthly expenses and give you more control over your finances, ensuring that you are not overwhelmed by debt and interest payments.

Avoid Negative Consequences

Failing to pay off high-interest debt can have severe negative consequences, including damage to your credit score, late fees, and even legal issues. By using your life insurance payout to eliminate this debt, you will avoid these potential pitfalls and secure your financial future.

Create an emergency fund

Creating an emergency fund is one of the first steps in financial planning. It is a savings account that is used to cover unexpected expenses, such as a job loss, medical bill, or car repair. The funds can help provide financial stability and peace of mind in the event of an unexpected event.

• Determine how much you need in your emergency fund: The amount you should have in your emergency fund depends on your lifestyle and income source. If you have a stable income and your job is secure, you can have a smaller emergency fund. If you are self-employed or your income is unstable, you should aim for a larger emergency fund. As a rule of thumb, aim to have at least three to six months' worth of living expenses saved.
• Choose the right type of account: Keep your emergency fund in a savings account or fixed deposit so that it is easily accessible when needed. Look for accounts with high interest rates, such as a high-yield savings account, to earn interest on your balance.
• Invest in safe financial instruments: Invest your emergency funds in safe financial instruments that are not affected by short-term market volatilities. Avoid investing in long-term investments such as retirement accounts, as you may need to access the funds quickly in an emergency.
• Consider other insurance: While saving for an emergency fund, consider investing in other types of insurance, such as health insurance or accident insurance, to further protect yourself and your family financially.
• Make saving a habit: Consistently set aside money for your emergency fund. Create a system for making regular contributions, such as automatic recurring transfers from your checking account to your savings account.
• Monitor your progress: Regularly check your savings balance and celebrate your successes. This will help you stay motivated and on track.

Purchase an annuity

Annuities are a type of insurance contract designed to turn your money into future income payments. You can buy an annuity with either a lump-sum payment or several payments over time. Annuities are typically purchased later in life to provide additional income during retirement.

Annuities can be set up with a growth period, during which savings are built up. The return on an annuity depends on its type. For example, a fixed annuity pays a guaranteed interest rate, while a variable annuity lets you invest your savings in mutual funds.

When you're ready, you can start collecting income payments from your annuity. You can set these payments up over a fixed period or have them guaranteed for life. This makes annuities a form of insurance against outliving your savings.

Annuity death benefits are smaller than those of life insurance policies, and your heirs would have to pay income tax on your annuity investment earnings. However, annuities offer better investment and income benefits while you're alive. Your return is higher because you aren't paying for life insurance coverage. Instead, all the money is put toward an investment.

There are several types of annuities:

• Fixed Amount: You select a monthly payment amount, and the payments continue until you stop them or run out of money.
• Fixed Period: You choose a defined period (e.g. 10, 15, or 20 years) to receive payouts. After your death, payments may go to your designated beneficiary.
• Joint and Survivor Life: The company pays you or your survivor for as long as either of you is alive. The amount of the regular payments is typically smaller than the Life Only option, as the company pays for the longer of two lifetimes.
• Life with Period Certain: This option gives you an income stream for life and the opportunity to select a guaranteed period, such as a 10-year guaranteed term. This means your annuity must pay your estate or beneficiaries even if you die before the guaranteed period ends.

Invest for growth

If you receive a lump sum life insurance payout, you may want to consider investing for growth. This means buying investments that focus on capital appreciation. While you won't receive money until you sell the investment, if you hold it long enough, you have the potential to make much more money than you spent.

You can store your growth investments in taxable brokerage accounts and tax-advantaged accounts to build long-term wealth. Each type of account has its own advantages. Retirement accounts are either tax-deferred, meaning you don’t have to pay taxes until later, or funded with post-tax money that grows tax-free. These tax benefits can save you a significant amount of money.

Taxable brokerage accounts, on the other hand, have no contribution limits, so you can invest as much money as you want. Money in taxable brokerage accounts is also liquid, meaning you can sell stocks, index funds, and other liquid investments at any time without incurring early withdrawal penalties.

When considering how to invest a life insurance payout for growth, it's important to keep in mind that life insurance policies don't provide unlimited money, so you need to use the money strategically. Before investing for growth, consider paying off any outstanding debts, covering living expenses, and building an emergency fund.

Once you've established financial security, you can make the remaining money grow by investing it. Some options for investing for growth include:

• Growth stocks: These are stocks of growth-oriented businesses, including industries such as technology, healthcare, and consumer goods. While growth stocks come with a certain level of risk, they tend to provide the best return on investment over time. Examples of popular growth companies include Google, Apple, and Tesla.
• Index funds: Index funds follow a benchmark index, such as the S&P 500, and are considered low-risk because they are highly diversified. They tend to have low expense ratios and are tax-efficient due to their low turnover ratio. Index funds typically have high returns that beat most actively managed mutual funds.
• Whole life insurance: Whole life insurance is a type of permanent life insurance that provides coverage for your entire life as long as you continue to pay the premiums. One of the benefits of whole life insurance is that it accumulates tax-deferred cash value each year, which can be accessed without incurring taxable gains. However, whole life insurance is more expensive than term life insurance and offers less flexibility when it comes to modifying coverage and choosing how to invest the cash value.
• Term life insurance: While term life insurance is less expensive than whole life insurance, it is only active for a specific length of time. If you decide to go with term life insurance, consider investing the difference in the stock market, as this has the potential to yield higher cash benefits.
• Annuities: Annuities provide a guaranteed income stream, ensuring that you never run out of money. There are two main types of annuities: fixed annuities, which provide a consistent interest rate, and variable annuities, where the return depends on the performance of the underlying investments. Variable annuities have higher growth potential but also carry more risk.
• Real estate: Investing in real estate can be a way to create passive income. You can buy properties to rent out to tenants, or invest in online real estate platforms that allow you to invest in pieces of properties you couldn't afford on your own.
• Alternative investments: While alternative investments like cryptocurrency or fine wine may carry more risk, they can also have higher gains than standard investments.

Remember, it's always a good idea to consult a financial professional when making investment decisions.

Consult a financial professional

When dealing with a life insurance payout, it is highly recommended to consult a financial professional. This is because they can help you make sense of your options and avoid making any hasty decisions with your money. A financial professional will be able to offer you a comprehensive overview of your financial picture and help you determine the best course of action for your specific circumstances.

A financial professional can help you to understand the different ways in which you can receive your payout. For example, you may receive your payout as a lump sum, as an annuity, or in the form of regular installments. They will be able to talk you through the tax implications of each of these options. For example, while the death benefit itself may not be subject to income tax, any interest earned by those who elect an instalment payout option may be taxable.

A financial advisor can also help you to understand how best to use your payout. For example, they may advise you to pay off any high-interest debt, such as credit card debt, or to put your payout into a high-yield savings account. They can also help you to understand how to use your payout to create an emergency fund, and how much you should aim to have in that fund. If you are unsure of how to invest your payout, a financial professional can advise you on the best investment strategy for your circumstances, and help you to understand the level of risk you may want to take.

It is important to find a financial advisor who is qualified and who you trust. You may want to look for a financial planner who is a fiduciary, meaning they are legally and ethically bound to act in your best interests. It is also worth considering finding a planner who specialises in the area you need help with, for example, someone who specialises in helping widows or widowers.

Frequently asked questions