“Too many times, people don’t plan for the ‘what ifs.’ What if I don’t come home tonight? What if I have 6 feet of water in my house?” says Emmett Dupas III, a wealth manager for Northwestern Mutual.
Financial advisors, insurance agents and estate attorneys see it all too often: people going through life without a solid plan for the inevitable, including the loss of a loved one, and making mistakes that will cost them and their families in the long run.
In the case of a life insurance payout, advisors say most people are not used to a sudden windfall of money and don’t have the foresight to anticipate their real needs or those of family members left behind.
“People, unfortunately, spend more time planning their vacations than on their own financial situation,” says Dupas.
And when a grieving heir is handed a lump-sum payout, he/she may make irrational decisions like buying a new car, a second home or other impulse purchases in the absence of a well-thought-out plan. “Then, after the unwise spending, they discover that they cannot meet their daily financial obligations,” adds Walt Johnson, a certified senior analyst.
But it doesn’t have to be that way when it comes to investing and spending these “legacy dollars.” After all, a life insurance policy is intended to help protect or buffer those left behind from financial hardships, and to help them maintain the lifestyles they had before the death of their loved ones.
“The question one has to ask themselves is: What was the purpose of the planning to begin with?” advises Dupas. Are the funds meant to replace a loss of income, to create an educational or trust account, or to pay estate taxes, debts, medical and funeral expenses, or for all of the above? To determine what is best for your family, take into consideration the ages of your children, spouse and for how long they will need those proceeds, maybe 10 to 20 years following the death of a loved one. Special-needs dependents may have a lifetime of dependency on life insurance proceeds.
During the grieving process, people may not want to deal with life insurance payout options right away; doing so in a prompt fashion, however, can protect them from making quick and irrational decisions about funds that could help build their futures. Financial advisors agree this is a time to reflect on the things that matter most in life and to contemplate the legacy of the people they’ve lost. “When people take a step back, take a breath, and think about the meaningful things that bring them happiness, they can make sound planning decisions on how to save, spend, invest and give to charity,” says Steven Dugal, a Northwestern Mutual managing partner.
Lay the Ground Work/Pre-plan
Financial experts advise clients to consider their life insurance goals well before the death of a spouse. Doing so can reduce stress and the chance of making poor decisions in the wake of an unexpected death.
“Make a list of what is most important to you, and then design a financial plan that best addresses that list,” adds Johnson. “Having a plan in place allows [you] to monitor the plan, and to determine if the current investment strategy is getting the job done.”
“If you are not able to gain clarity on your own, strongly consider working with a financial expert who asks tough questions and helps you to build a comprehensive financial plan that puts you on a path towards personal fulfillment and financial security,” advises Dugal.
Meet Your Match
In order to find an advisor who will (1) look after your best interests and (2) be the best fit for a long-term relationship, start by interviewing several consultants. Ask about their financial-planning philosophies, and then ask for credentials and referrals. Check with various licensing agencies to make sure he or she is registered and licensed as proposed. It’s also important that potential advisors make a practice of meeting with you annually to discuss your policy, goals and possible alterations.
“Remember, what little amount of money you pay for financial advice may keep you out of trouble and pay for itself,” advises Johnson.
Investing and Spending Plans
People who choose to receive a lump sum of insurance proceeds must exercise extra care in planning, particularly if the payment will replace the lost income of a loved one. However, there is a lot to consider when a large amount of money suddenly becomes available. Financial advice becomes even more imperative. “Decisions should be rooted in a comprehensive financial plan, addressing unique goals, dreams and debts,” says Dugal.
If the beneficiary chooses not to receive the entire amount at once, he/she may consider several types of annuity payout options. Annuities are promises, normally by insurance companies, to pay a certain amount over a specified period or deferred to a future period. These yearly income options are easy to understand on the surface, but analysts advise their clients to research the implications of each payout method before making a decision.
Considerations should include implied return on the investment, length of time the payments will last, the rating of the insurance company, penalties for early termination of the contract, and annual costs or fees.
Heirs may also consider investment opportunities, like mutual funds or stocks to meet mid-or-long-term goals. “The right plan will help someone pursue a comprehensive list of goals without sacrificing other goals in the process,” says Dugal.
When it comes to investing insurance money, clients’ needs differ, so drawing up an investment plan is certainly not a “one-size fits all” approach. Meeting with a financial professional can help you decide whether investments are the right option for you.
“Starting with a small amount of money to invest will generally force the individual to have to take greater risks to accomplish even the simplest goals,” adds Johnson. “The individual may have to reassess their budget, and begin a more stringent savings plan in order to free up funds to invest, or the individual will have to reduce his financial want list.”
“Diversification is key,” Dugal suggests. “Often we see executives with a large percentage of their investments in a particular industry or with a particular company. In a downturn, that strategy could be costly.” Dugal and his team encourage clients to create a long-term plan and stick with it. “In those moments of uncertainty, it’s important for all of us to review our client’s financial plans and not overreact. The key is to create plans that make sense in any market environment and stay the course.”
The general consensus:
• Seek help from those in-the-know.
• Expect the inevitable ‘what-ifs’.
• Consider the things that matter most to your future.
• Have a plan in place.
• Experts say don’t underestimate the value of life insurance proceeds because these funds are not only the living legacy of the deceased, but are also an investment for those left behind.
*This is not investment advice offered by any advisors.
