by Richard Dri
When the reality of life insurance sinks in.
GRIEF. GUILT. THE UNEXPECTED EMOTIONAL GUT PUNCH OF A LIFE INSURANCE CHECK.
You and your spouse both knew that life insurance made perfect sense. Now as a widower, why do you feel so guilty?
I don’t think there’s a person reading this who doesn’t understand that life insurance is one of the most practical purchases anyone could make. It’s our nature to ensure our families are well taken care of, even once we’re gone. Maybe especially after we’re gone.
How much insurance is the right amount of insurance?
When calculating life insurance needs, I start by removing all emotion. That might sound cold and clinical, but it’s basic math.
I use an insurance calculator to determine how much life insurance coverage Spouse A will need if Spouse B dies – then I reverse the calculations to decide the needs of Spouse B if Spouse A dies first.
My objective is simple and rational: to ensure that either spouse has enough money to maintain their lifestyle should the unthinkable occur.
A phrase that was new to me: “Life insurance guilt”
You won’t find the term “life insurance guilt” in a medical journal. But I find it’s a very common issue. And here’s how I came to know it, personally.
My wife of 33 years died of cancer. Not long after that, I receive a life insurance benefit. How big or how small that benefit was, that doesn’t matter. I was wracked with guilt.
Why?
I’m a financial advisor. I’ve gone through the clinical steps of discussing life insurance countless times. But still, I was paralyzed by my emotions. I couldn’t think objectively. All I could think of was that the life insurance policy was supposed to help Mary when I died – not the other way around.
What should you do with a life insurance payout?
First of all, any widower receiving a death benefit should deal with the psychological effects before making plans for the money. I can’t stress that enough.
When you’re ready, this is what I’d recommend – this is advice I use across the board, fulfilling the purpose of getting life insurance in the first place. I’ve divided the next steps into four buckets:
- Replace lost income
The loss of a spouse often means a loss of incoming salary – potentially half or more of your household income. Yet monthly expenses don’t drop all that much. That results in negative monthly cash flow (clinical financial advisor talk) into your home.
Because of this, I suggest investing the proceeds into a conservative investment strategy where, each month, the necessary amount of money is automatically redeemed from the investment pool and deposited into a checking account. This amount can represent the cash flow deficiency caused by the loss of one salary.
- Get out of debt
As a conservative financial planner, I hate (yes, hate) non-deductible debt such as lines of credit, credit card balances and outstanding mortgages. So, get rid of those best you can.
Start with the debt with the highest interest rate. Then work yourself down the list until the life insurance proceeds are depleted or the debt has disappeared.
- Save and invest
Once you’ve eliminated non-deductible debts, and still have life insurance funds left over, consider capping off your unused IRA, 401K, Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA) contribution if allowed. These contributions may help reduce your taxable income, which may bring you a tax refund for the year of the contributions.
If you have school-aged kids, consider saving up for their education by investing in a Registered Education Savings Plan (RESP) (Canada) or in the US., 529 plan.
- Give good gifts
So, you’ve completed 1, 2 and 3 of the above. And you still have some payout left. What now? Why not consider sharing some of the money with your kids (maybe planning a big family adventure with them and their families), or donating to a favourite charity. Ask yourself, “What would my spouse do with the money if the situation was reversed?” They’d probably do something thoughtful that would honour you and your life. Do what they’d do.
A payout is not a check. It’s a testament to a life lived.
