Should you reverse your life insurance payment?

Here’s why it might be a good idea.

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Key points

• Many people who receive a life insurance payout make a large sum of money at one time.
• It’s important to manage that money wisely so it lasts as long as you need it.

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People often buy life insurance hoping they will never need it. But in some cases, life insurance becomes necessary. And if the tragedy has affected your family, you may receive a large sum of money from a life insurance company.

The question is: What should you do with that cash? You can keep it in your savings account, where it can earn some interest. Or, you could consider inverting it.

This last option may seem risky. But here’s why it actually makes sense.

You might as well put that money to work

Most people are advised to get enough life insurance to replace their wages at least 10 times. So, let’s say you just tragically lost a spouse who was the sole breadwinner for your family and brought home $100,000 a year. You may now have a life insurance payout of $1 million.

But chances are you don’t need all that money at once. Even if you have a few medical bills to pay and a funeral to cover, you may only make a small dent in that $1 million down payment. So it’s worth investing a portion of your pay, any money you don’t expect to need in five years or so. That way, you can convert that money into a larger sum, which, in turn, should give you more options to cover expenses as needed.

Get help investing your life insurance payment

If you’ve never picked a stock or opened a brokerage account, then investing a large sum of money is something you probably don’t want to do on your own. A better bet may be to enlist the help of a financial adviser; Ideally, one that charges a fee that is a percentage of your assets under management.

A financial advisor can sit down with you and help you design an investment strategy based on your needs and goals. Perhaps you are willing to return to the workforce now that you are the only surviving parent in your household, but you only want to work part-time so you can still be there for your children. An adviser may take that into account when choosing your investments, as well as factors like your existing debt (like your home mortgage) and long-term goals, like being able to give your kids some money to pay for college.

To be clear, it’s never a good idea to invest funds that you think you might need years from now. Investing every dollar of your life insurance payment may not be the best way to go unless you have enough savings to cover several years’ worth of bills.

But you may want to consider investing half of your life insurance payment, or a third. Doing so could help ensure that you have even more income left over from the all-in, and that your family is more financially protected in the wake of an unspeakable loss.