What Should I do with the Proceeds from a Life Insurance Policy?

Jordan Haddox |
Life insurance is a way for our loved ones to take care of us after they have passed. It can help to alleviate some of the stress that may come from your loved one passing by allowing you time to grieve without worrying about finances. It can also help to cover any final expenses. With that in mind, a large influx of cash at such an emotional point in someone's life can often have adverse side effects as well.
With any large amount of unexpected income, there are always four potential options that are on the table: Spend, Save, Invest, or Give. Each one of these have their pros and their cons, and everyone's scenario is different. Let's look at what you might want to take into consideration, as well as some of the options you have in each of the four categories.

What are your options?


One of the first things you may need to do is to take care of any pending end-of-life expenses. Making sure all outstanding estate debts are taken care of should be the priority. You may also want to allow yourself to spend a portion of the money on some time away with family to allow yourself the ability to mourn on your own time.

What you will want to avoid in the "Spend" category is spending money on things as a form of grieving. All too often, people will go on a spending spree with any inheritance they may receive and start buying things they normally can't afford to help cope with their loss. This often ends with them being in a worse place than before their loss.


The next option that you have is to save. This is one that many people choose. You can actively choose to save your money in a savings account, money market account, or a CD. What you don't want to do is to put the money into a savings account while you are trying to decide what to do, and then leave it there for a long period of time because you never get around to it or because it brings up bad memories every time you think of doing something with it. Again, your loved one intended for this to alleviate stress and pain, not cause more of it.

In recent history, the interest rate that you would have received on this type of account could have been somewhere between 0.25% and 2%. Right now, that number may be a bit higher than in recent history, ranging from about 1% to 5%. Many people view this as the best option because of the safety that it provides; however, with inflation as high as it is, even the slight uptick in interest rates will not keep up with inflation, causing you to lose purchasing power.


The third option that you have is to invest your money. This category may have the widest range of options available. Investments could include things like stocks, bonds, exchange-traded funds, mutual funds, treasury bills, rental properties, precious metals, etc.

While this has the most options, this may also have the most volatility. Investments can fluctuate in value more than savings accounts, money market accounts, or CDs, which have little to no fluctuation. This is why it is important for you to understand your personal risk tolerance and how much potential fluctuation you can tolerate. What investments are right for you will depend on your risk tolerance and time horizon, or the amount of time you plan on having the funds invested.

You also have the option to either self-direct your investments or to have a financial advisor to help with your decision making. When determining if you should take a DIY approach or should hire a professional, consider if you have the 3 T's of investing: the Time, the Temperament, and the Talent. First, you need to determine if you have, or can create, the necessary time needed for a DIY investment approach. Next, you need the temperament, or the mentality, to be able to mentally withstand the market fluctuations that your investments will experience. Lastly, you need to have the talent to be able to handle your investments on your own. All three of these are somewhat subjective to each person, but still deserve thoughtful consideration before making any investing decisions.


The last option that you have is to give. No, you're not crazy to consider donating funds to your favorite charity or your local church congregation. In fact, many people give donations from these funds as one last way to honor their loved ones. Many times, people will give to their loved one's favorite charity, rather than their own.

When giving, there is a chance that you may qualify for a tax deduction (though you would need to check with your accountant or CPA on this). If you do, don't feel guilty in taking that deduction. Often, people do not take a deduction for charitable giving because it feels weird, or maybe they don't want it to seem like they gave for the charitable deduction. If you are going to be generous with your funds, using the deduction that you receive should be viewed as a way of being a good steward of what you have received. Also, if it allows you to owe less in taxes, it may also allow you to be even more generous with what you saved in tax money.



Before you make any decisions

It is important to remember that everyone heals on their own time and that you are in no rush to make any decisions. As you consider your options:

Take a breath.

The first thing that you should do after getting any amount of money from a life insurance policy is to allow yourself time to grieve the loss of your loved one. The money can wait until you have allowed yourself time to stop and remember and honor their lives. Take a breath, allow yourself time to mourn. Then, when you are ready, you can move forward. Your loved one made sure you would have this money to help alleviate stress, not to add more stress to your life.

Consider what your loved one would want you to do.

One thing most people are very concerned about is making sure they honor their loved one's memory with the money from a life insurance policy. Consider what they would want you to do with this. Almost always, the answer to that question is they would want you to use it in a way you see best fit for you or your family. At the end of the day, make considerations but allow yourself freedom to use it in a way that both honors them and best benefits you or your family.

Acknowledge the blessing.

Some people tend to feel guilty when they receive life insurance money. It is common to feel that you would give it all back plus more if it meant being able to have your loved one back. That statement can be true while you are also doing something with the money. Give yourself permission to both grieve and to use any life insurance proceeds in the way that best benefits you and your family.




Life insurance proceeds should be viewed as one final blessing to you from your loved one, not as something to feel guilty about receiving. It can set you, your children, and your family up to be able to life the life that your loved on had hoped and envisioned for you. It is important for you to act wisely and make the most of what they have given you. This is how you can honor your loved one the best.