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Best Ways to Manage Life Insurance Proceeds After a Spouse Dies

What to do and what not to do if this happens to you

By Kerri Fivecoat-Campbell

I handled all the household finances and bills throughout my 32-year-marriage to my husband, Dale. But when he suddenly died of a massive heart attack at 57 last year, I was so traumatized by the loss, I couldn’t think clearly about managing his life insurance proceeds. In an instant, I had more cash rolling in from it than either of our incomes had ever produced.

Life Insurance Proceeds
Credit: Adobe

Luckily, I have a family member who’s a finance expert. He helped me make key decisions about how best to handle the money. That meant figuring out things like what debt should be paid off, how much to leave in liquid assets (like bank accounts and money-market funds) and setting up a budget.

But not everyone has someone like that. If you don’t, here’s what I suggest you do if you find yourself needing to manage life insurance proceeds after the death of a spouse.

Find an Expert

The first thing to do: find an expert.

If you don’t have a friend or family member with a track record and credentials for handling finances, hire a Certified Financial Planner (CFP) skilled in handling life insurance proceeds or one who’s experienced in consulting with people in life transitions, says Kathleen Fish, a CFP at Fish & Consultants in Memphis.

After getting an adviser on your side, Fish says, assess your situation and take care of your immediate needs.

But do it quickly.

“If people come to us before making financial mistakes, we can help them,” says Fish. “There have been so many cases where people have come to us after it’s already too late.”

She cited the case of a widow who sought her advice after spending nearly $1 million in life insurance benefits in under two years. “She had less than $75,000 left and still had a mortgage,” says Fish. “She only worked part-time and wanted to invest it, but all she could do at that point was sell her home and get a full-time job to support herself.”

Jim Uren, a CFP with Phase 3 Advisory Services in Buffalo Grove, Ill., says a good CFP can not only assist you in making initial decisions about saving, investing and debt, he or she can also help you set up a budget. Uren advises finding a qualified and reputable CFP through the CFP Board of Standards.

Focus on Immediate Needs

After getting an adviser on your side, Fish says, assess your situation and take care of your immediate needs.


“Look at what has to be paid now, soon or later,” says Fish. “Things that need to be taken care of immediately are living expenses, medical bills, funeral arrangements and investigating Social Security.” Other things can likely wait.

Speaking of Social Security, iI you have dependents under 18 living with you at home, you’re likely due Social Security survivor’s benefits. If you’re over 60, you may be entitled to widow’s benefits from Social Security, depending on how long you’ve been married.

But if you’re under 60 with no dependents at home, as I was, you’ll have to also take into consideration that you will be without your spouse’s income and need to figure out how to cover that in your budget.

4 Things to Do With Life Insurance Proceeds

Four more things Fish and Uren advise you do:

  • Pay off high-interest credit card debt. “If you have credit cards and they’re in your spouse’s name only, you may or may not have to pay those off, depending on the state,” says Uren.
  • Come to terms with your housing reality. Fish says you might have to sell your home if there isn’t enough money to sustain the lifestyle you and your late spouse shared. On the other hand, she has seen people who have mistakenly paid off the house before knowing if they actually had the cash flow to live there.
  • Review your retirement funds and, if you have children who’ll be attending college one day, your college funds. “Make sure you really look under the hood to make the best decisions both now and in the future,” says Fish.
  • Investigate your tax liability. Uren says, with rare exception, life insurance proceeds are not subject to federal income tax. However, once you receive the money, you will be subject to taxes on any income that money generates. For example, if you put the insurance payout in an interest-bearing account, you may be taxed on the interest earned in that account.

3 Mistakes to Avoid With Life Insurance Proceeds

And here are three things Fish and Uren say you should not do:

  • Don’t think you deserve to have fun with the money after what you’ve been through. This includes things like shopping sprees or extravagant vacations. Uren says taking a vacation should only happen after all the financial concerns have been addressed, high-interest debt has been paid and a budget (for now and in the future) has been considered. “I’ve consulted with clients where a vacation was needed, so it’s not necessarily bad. But it depends on the financial position,” says Uren.
  • Don’t make costly investments or put the money into any investments that lock you in. Specifically, watch out for large fees and commissions. And avoid putting life insurance proceeds into an irreversible fund you can’t access. Uren points out that you will have time to make investment moves once things become clearer. Irreversible means “really difficult and/or costly to undo,” says Uren. For instance, an investment or insurance product with a large surrender charge (what you’d have to pay to get out of it) or an illiquid investment like an oil and gas partnership where your money could be tied up for years.
  • Don’t rush to pay off all your debt. Be discriminating. My adviser said it would be best to put the insurance funds to pay my mortgage in a separate account, but not pay off the loan immediately. Instead, I needed time to decide if I will sell my property. This leaves the money available to pay my living expenses and anything urgent that comes along.
Photograph of Kerri Fivecoat-Campbell
Kerri Fivecoat-Campbell is a full-time freelance writer and author living in Louisburg, Kansas, just south of Kansas City. She is the author of the best-selling book, “Living Large in Our Little House: Thriving in 480-Square Feet with Six Dogs, a Husband and One Remote,” and administers a Facebook page, Living Large in a Little Town. Read More
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