Dealing With Insurance Proceeds

This is a very popular and common question I get after the loss of a spouse.  Figuring out the answer can be complicated by various moving parts, people, and usually a few unknowns.  It can cause an internal conflict that can paralyze people, leaving them unsure what to do, despite their best planning efforts.  This often happens for three key reasons and by being aware of them, widows and widowers can work their way through the situation and come to a decision that works best for them.

Spouse Said To

Life insurance is often purchased as a way to replace a spouses earning power and to make sure their significant other is taken care of should anything happen to them.  As a result, it’s a common strategy to purchases life insurance at a level in which a mortgage and other major bills could be paid off.  For example, if a couple has a $250,000 mortgage and a $20,000 car note, they may opt to take coverage around $300,000 so that if something were to happen, both major obligations could be eliminated.

While logical, it’s often not very personal which is what makes it confusing.  On paper, the plan was to pay-off the house and other things with the proceeds, but now that they’re facing retirement and life on their own, the original plan may not be as relevant.  Reality is, some spouses don’t want to stay in the house, may feel it’s too big and too much work to keep up.  The may want to move closer to family or friends or to a new climate that their former spouse was opposed to.  In other words, just because the plan was to pay off the house, doesn’t automatically mean it’s the best thing to do now that things have changed.

The Family Grab

Having run a bank trust department for a number of years, I have learned that the loss of a loved one can quickly turn into a financial situation rather than an emotional one.  In other words, family and friends can begin to come out of the woodwork and either suggest that they deserve or are entitled to a monetary benefit, or request financial support for an immediate business or personal matter.

Guilt, shame, and even outright anger can be used to try and persuade the remaining spouse to part with a portion of the life insurance proceeds. Given their emotional state, they may go back and forth on and whether to help now or save it for themselves later.  I know that nobody wants to think of their family in this way, but it happens can definitely turn a spouse’s financial future upside down if it’s not managed.

That’s the emotional tug-of-war that begins to take place. First they have the original plan that says their supposed to pay it off.  Then they start wondering should I help or hold onto the funds, and finally, they start asking other people including professionals what they should do, which can make it even more confusing.

Opinions

As you might expect, everyone has an opinion, suggestion, or financial person they should talk to.  This becomes a huge problem because the spouse doesn’t typically have a framework to filter out good or bad ideas.  This is the paralyzing part because as soon as they think they are finally ready to make a decision, so-and-so shows up or calls, and after sharing their two cents, its back to feeling indecisive.

These factors plus the emotional aspect of losing a loved one can make the decision complicated and confusing.  Over the years, I have found the best place to start is to freeze everything and take time to grieve and mourn.

Take time to focus on your feelings and finding ways to deal with the situation as you begin to build a new life on your own.  Consider developing a blanket statement such as, “I won’t be doing anything new or different for a few months, so please give me the time and space I need to work through this before suggesting any changes.”

Having worked with widows for years, there are stages of grief, which can last weeks or months and sometimes require counseling and medication to help cope with their loss.  Those are not good times to make financial decisions.

However, over time, people begin to understand and acclimate to their new life, and position themselves to make good-long term decisions.  They begin to see things in a new light and come to terms with the idea that memories are in the heart and mind, not necessarily in stuff.

They realize that keeping their spouses old sailboat doesn’t make sense when someone else could experiencing the same joy he found in it. Or that the jewelry she wore on their first date, could spark a loving marriage with another couple.  And in some cases, that a new family can use their home to crate family traditions and memories of their own.

I often suggest widows and widowers take the first year to work through the situation and to redefine the next phase of life.  By keeping things status quo as they acclimate, they can also begin to use small decisions, like what to do their spouses stuff, to build momentum and direction for larger decisions ahead.

By taking their time and seeing where life takes them, they can feel more confident in their decision to pay off the mortgage, sell the house and move, disburse funds to family and friends, or keep paying the mortgage to build up equity and for a tax deduction.

Overall, the best answer to this question is a very personal answer that may not be easy to see and figure out right away.  There is no best answer, and more importantly, I believe that someday when you are reunited with your spouse, they’re going to greet you with open arms and a heartfelt smile no matter what you decide to do with the life insurance proceeds.