Advice for handling life insurance payout

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Tiger85
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Joined: Sun Jul 07, 2013 6:35 pm

Advice for handling life insurance payout

Post by Tiger85 » Fri Feb 08, 2019 2:24 pm

I handle all our finances, and my wife is happy with that. She and I are on the same page with the type of lifestyle we live, saving, etc., but she leaves the investing and other details to me. We try and discuss our overall finances once or twice a year, but she's never been too interested in the details. I’ve read a few posts on here from folks with similar situations and saw the idea to type up a document for managing our finances in case anything should happen to me. I’ve done that and the instructions are pretty basic Boglehead philosophy on investing, but one area I had a question on was how best to instruct her to handle the life insurance money she would receive if I was to pass away. I read the basics on the wiki of don’t do anything with the bulk of the money for at least a year and talk with an adviser, especially for help with taxes, but beyond that I wasn’t sure what to tell her.

Our situation:
- Age: 34 (me), 32 (her)
- Income: $135k/year (mine), she stays at home with our 4 kids ages 12, 6, 4, and 2
- Term life insurance payout: $3.2 million
- Debt: $330,000 Mortgage on a house we just bought last year with a 30 year fixed 3.875% interest rate. No other debt
- Emergency fund in savings account: $25k
- Retirement accounts (2x IRAs and TSP): $150,000. Maxing both IRAs and putting $5k/year into TSP
- 529 plans: Total of $30k between all kids

My questions:

1. After putting a year’s worth of living expenses (call it $100k) in checking/savings, where should she park the rest of the money for the first year while she sorts everything out?

2. Would paying off the mortgage with the payout make sense? My initial though would be no, due to the low interest rate, but wasn’t sure.

3. Any other advice you would recommend? (Other than hoping this situation doesn't come up anytime soon and is just an exercise in financial planning :D )

Thank you.

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mhadden1
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Re: Advice for handling life insurance payout

Post by mhadden1 » Fri Feb 08, 2019 3:21 pm

1) Right now money market is fine. Of course, that may change over the 20 or so years that you are concerned with, while your children grow up and launch.

2) Right now paying off the mortgage is fine. Again, that may change over the 20 year period.

3) I would try hard to use TSP contributions, etc. to stay in the 12% federal tax bracket. (Maybe you are already there with your 4 child credits - I did not check the rules/do the arithmetic).
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livesoft
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Re: Advice for handling life insurance payout

Post by livesoft » Fri Feb 08, 2019 3:27 pm

2) No, paying off the mortgage doesn't make any sense.

I saw mostly dread and fear in the people I know who got a life insurance payout. They had all kinds of bank reps and church reps trying to help them out nicely. I would flatly state to put the money at Vanguard in a US Treasury money market fund. This will make it more difficult to have it get sucked away by leeches. And it will prevent the "helpful" folks who talk about FDIC insurance and guaranteed fixed income annuities from getting their hands on it.

But there is a danger that it will stay years and years in such a money market fund, so there has to be explicit instructions to get it out of there. Indeed, I would (and do) make sure my spouse does her own transactions in her Vanguard account, so that she knows her way around the Vanguard.com web site.

And instructions should be given of what NOT to do and not just hints at what to do. Example: Do NOT ever ever let the Edward Jones rep from church do any business with the family money.

Plus make sure spouse is completely comfortable with NOT using someone face-to-face to accomplish things. That is, make sure they are comfortable using online-only like Vanguard. Do this ahead of time.
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SoonerD
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Re: Advice for handling life insurance payout

Post by SoonerD » Sat Feb 09, 2019 2:04 am

Congratulations on having what seem like a prudent amount of term life insurance. Your wife and children will be grateful if it becomes necessary.
Tiger85 wrote:
Fri Feb 08, 2019 2:24 pm

1. After putting a year’s worth of living expenses (call it $100k) in checking/savings, where should she park the rest of the money for the first year while she sorts everything out? Money Market fund at Vanguard or Fidelity. I'd prefer the Federal Money Market Fund for maximum safety of the underlying assets in the fund.

2. Would paying off the mortgage with the payout make sense? My initial though would be no, due to the low interest rate, but wasn’t sure. Yes, payoff the mortgage. No one needs to carry debt with $3.2mm available. I do not believe in the "good debt" marketing banks and realtors use and parroted by so many, including many BH posters. A mortgage is reasonable, if necessary, to get into a family home. Otherwise pay it and let her live unencumbered.

3. Any other advice you would recommend? (Other than hoping this situation doesn't come up anytime soon and is just an exercise in financial planning :D ) Yes, have a plan in place regarding deploying the rest of the life insurance. Your wife should be well informed of the AA that fits the family's needs and familiar with how to make the trades. Discuss the 3-fund portfolio and come to an agreement on an AA for years 1-5 following your passing as well as any intended glide path for her AA as the children grow and she ages.

Help her understand how to identify sharks and develop her confidence in managing money so she doesn't fall victim to the scumbags that pray on widows.

You didn't mention how you structured your term life. In your shoes I would want $4mm in private insurance (not employer provided policy). If you leave your employer, typically the policy becomes not market competitive for you to retain it. So I would get $2mm with 30 year term and another $2mm with 20 year term. This provides $4mm coverage until the youngest is age 22 and then provides $2mm the next ten years until you & wife are age 60+. I would use 4 different providers and seek $1mm from each.


Thank you.

fujiters
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Re: Advice for handling life insurance payout

Post by fujiters » Sat Feb 09, 2019 6:53 am

I recommend instructing her to dump it into the Vanguard LifeStrategy Income Fund (VASIX) until she feels like she has a reason to move it into something else. Also leave your instructions with an introductory book on investing and retirement (perhaps The Bogleheads Guide to Investing) and encourage her to read it before making any other financial decision. Perhaps also recommend Vanguard's PAS, if she feels she needs help.

The LifeStratagy fund will help to keep pace with inflation if she leaves the money there for very long (a risk with a money market fund), but it also sufficiently conservative that a huge drop in the market won't result in a big drop in her account, which should keep her from getting spooked and selling low.
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Mr.BB
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Re: Advice for handling life insurance payout

Post by Mr.BB » Sat Feb 09, 2019 7:27 am

"We try and discuss our overall finances once or twice a year, but she's never been too interested in the details."

You need to sit down with her and tell her she better "get interested in the "details"! If something happens to you this is all there is and if she messes up she and your kids will be in a world of hurt! You can also find some posts here about people and their friends that have gone through similar situations and the disastrous outcomes from making terrible decisions, as well as other horrible outcome from people who were taken advantage of from financial advisors (Edward jones, Merrill lynch, etc) as well as making terrible life decisions with their money. Make a list of these type of posts for her to read, maybe that will perk her interest.
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Rupert
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Re: Advice for handling life insurance payout

Post by Rupert » Sat Feb 09, 2019 9:32 am

It makes no sense to carry that mortgage when she has $3.2 million sitting in the bank. So, yes, she should pay off the mortgage. Then that's one less detail she will have to worry about going forward. As for the rest, I'd steer her to Vanguard's personal advisor service. They charge a reasonable fee, and if she uses them, at least you know she'll be invested in low-cost index funds.
Last edited by Rupert on Sat Feb 09, 2019 9:45 am, edited 1 time in total.

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Kenkat
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Re: Advice for handling life insurance payout

Post by Kenkat » Sat Feb 09, 2019 9:43 am

Be aware that there will likely also be substantial social security survivor benefits for your wife and children that can be claimed.

I would just put a payoff into either Lifestrategy Income or a Treasury Money Market fund as suggested above until things get sorted out. There is plenty of money available to meet short term obligations. At some point, she might consider Vanguard’s Personal Advisory Service to manage the money long-term.

livesoft
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Re: Advice for handling life insurance payout

Post by livesoft » Sat Feb 09, 2019 9:56 am

Rupert wrote:
Sat Feb 09, 2019 9:32 am
It makes no sense to carry that mortgage when she has $3.2 million sitting in the bank. So, yes, she should pay off the mortgage. Then that's one less detail she will have to worry about going forward.
That might sound great on the face of it, but if the mortgage is automatically set up in bill pay, then paying off the mortgage adds lots of details to worry about and definitely is not one less detail. This includes making sure property taxes and other taxes that are probably escrowed now get paid. Changing the online bill pay. Figuring out the mortgage payout amount. Wiring the money. Notifying the insurance company, too, and few other things.

Sure, consider paying off the mortgage in the future, but not when the insurance money appears in the checking account.
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Rupert
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Re: Advice for handling life insurance payout

Post by Rupert » Sat Feb 09, 2019 10:03 am

livesoft wrote:
Sat Feb 09, 2019 9:56 am
Rupert wrote:
Sat Feb 09, 2019 9:32 am
It makes no sense to carry that mortgage when she has $3.2 million sitting in the bank. So, yes, she should pay off the mortgage. Then that's one less detail she will have to worry about going forward.
That might sound great on the face of it, but if the mortgage is automatically set up in bill pay, then paying off the mortgage adds lots of details to worry about and definitely is not one less detail. This includes making sure property taxes and other taxes that are probably escrowed now get paid. Changing the online bill pay. Figuring out the mortgage payout amount. Wiring the money. Notifying the insurance company, too, and few other things.

Sure, consider paying off the mortgage in the future, but not when the insurance money appears in the checking account.
If OP and his wife have a joint account, their present automatic bill-pay arrangements won't be allowed to continue. Banks don't let individuals keep joint accounts. The present account will have to be closed and a new individual account opened. All automatic bill pays will have to be re-initiated. Just pointing out that things will not continue automatically as before upon OP's death. Might as well take care of the mortgage while the cash is sitting in the bank, before it's invested.

livesoft
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Re: Advice for handling life insurance payout

Post by livesoft » Sat Feb 09, 2019 10:31 am

^Then might as well open the individual account now and set up billpaying through it. That way the spouse will learn about finances and using an online bank account before the OP's demise.
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sailaway
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Re: Advice for handling life insurance payout

Post by sailaway » Sat Feb 09, 2019 11:10 am

The survivor should not pay off the mortgage until they decide whether or not to stay in the home. Therefore, it should probably follow the one year rule.

The survivor might want to move closer to family or old friends. Something might have happened in the home or a horrible accident took one or more of the kids, as well as the spouse and now the home is too big.

In this case, perhaps it would be reasonable to keep one year's expenses + mortgage payment off in money market and invest the rest according to the existing AA.

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Tiger85
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Re: Advice for handling life insurance payout

Post by Tiger85 » Sat Feb 09, 2019 6:59 pm

Thank you everyone for the replies. I will adjust the instructions for my wife and our conversations accordingly and go with the Vanguard Lifestrategy Income fund or money market fund. I will also make sure an add the part about what NOT to do and the type of people to stay away from. I hadn't thought about that and with how many people may come out of the woodwork if she suddenly had that much money, that's probably some of the best advice I can give her.

Also, to answer one of the questions about how the term life insurance is structured, the majority of it ($2.8 million) is through private insurance, the other $400k is through the SGLI (military). Thanks again!

cousindan
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Re: Advice for handling life insurance payout

Post by cousindan » Sun Feb 10, 2019 10:56 am

I agree with the statement of not letting your wife be blissfully ignorant to the ins and outs of money management. Its a critical life skill. Have her write the instructions so you know that it is not over her head.

If she is will never work even after the kids are grown and out of the house. Unless you live in a high cost area she should be fine with that amount of money in any interest earning investment. a simple 3% long term bonds would generate 96K/year.

The most dangerous time for her finances is if you were to go tomorrow. The longer you live the more money that will be socked away outside and the more time you have to train her on how to manage money during that time and not step on any expensive land mines.

As you do it would not be a bad idea to have her check any action plan here before making a move.

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