We all will die someday. Once we are gone we are nothing more than the assets we leave behind and relationships we have developed. Best of all our worries are over.
That of course cannot be said for those we leave behind. In addition to planning the funeral, dealing with the final tax returns, and probating the estate there is the issue of how to deal with the life insurance proceeds.
What would you do with a cheque for 400,000?
At the time you purchased your policy I am sure you knew exactly how the proceeds would be used. But after the death of a loved one you are in an emotional state, and it can be hard to make good decisions with a large sum of money.
Remember the money is for the used for the benefit of the beneficiary, not for the estate, family (unless it was part of planning process) or for friends. I know it is hard to say no to family, but for many this may be their only hope of making it financially. This is especially true if you have young children, or you depend on the income of your partner.
Using a total needs planning approach here are the top 5 to consider,
Pay Final Expenses
If you don’t have cash set aside of this then paying for the funeral and basic legal expenses will be needed. The Canada Pension Plan also provides a small death benefit. If you have not applied make sure you do right away. More on the HRDC website here.
Pay off Personal Debt
If you have a credit card balance, overdraft or line of credit paying this off with save you interest. By paying off this personal debt you can also improve your cash flow. Less payments means more disposable income.
Pay off Your Mortgage
Do you still owe on your mortgage? Then paying this off can also improve your cash flow. There is some debate as to whether this is a good idea. With interest rates so low … why pay it off. Although the argument seems like a logical one for many the security of owning your home makes this a good decision. When is it not? Will you move? Will you keep the home as rental and buy a new smaller home for yourself? If you are unsure … it might make sense to hold off.
Set aside money for your Children’s education
Many plan the total coverage to include and extra 30,000 – 50,000 for education for the children. If this is the case then you can set up an In-trust Account or an RESP. Each has its benefits depending on your whether a formal education is important.
Provide for Loss Income
The single most important reason for life insurance is to provided for loss of income. This can take precedent over all of the above and should be calculated with care. What are your current costs to live your life minus any income you have on your own.
Are you planning on staying home with your children, or will you be moving across the country to be closer to family, or are downsizing to simplify your life? Take the time to review your budget. Make sure not to under estimate your need for income.
So where to you go from here?
Rather than making a quick decision, open a bank account separate from your bill paying account and deposit the funds. Don’t worry about the interest rate or locking it in. This account will only be a holding account until you have decided how to best deal with the proceeds.
Shop for a financial professional and talk with him or her. Have them do an before and after using a number of different options. Should you pay off your home, how much income can you expect and what changes to your lifestyle do you expect etc.
Of course the question of how to invest the proceeds will come up. Have them do a investment assessment on your risk tolerance, and how they might suggest you deal with risk. All investments have them. You don’t want to lose your money and you don’t want to run out either.
Then compare the written game plan from two or three to get an idea of your options. This should make the decision an easier one.
Make sure to check with regulators on the status of each advisor you have spoken too. Three great places to check are from the BC Securities Commission website http://www.bcsc.bc.ca, the Insurance Council of BC http://www.insurancecouncilofbc.com and the Invest Right website http://www.investright.org/.
It is sad to say but something that happens when someone comes into a large sum of money. Everyone including “Uncle Joe” has an idea on what to do with it or knows someone that has a new investment idea. Ultimately it is your responsibility to know who you are taking advice from and how the money will be handled.
The most important thing is to take your time. If it takes you six months to decide who cares! Get the input of a number of professionals, get the ideas in writing, set your priorities and then you can do what is right for you and your family.