Living Off Life Insurance

by Michael on Jul 8, 2013 · 3 comments

Photo of Life Insurance Under a Magnifying Glass

In response to my post about handling a windfall, a reader named Eliza asked:

What do you do when the windfall is accompanied by tragedy? My darling husband of 27 years lost his battle with leukemia, leaving me a widow at 50. Yuck!

Now I am not only dealing with my grief and that of my two sons, but I also find myself with a couple of million dollars. I’m gripped with fear that I’m going to do the wrong thing and blow it.

I am still working and I did take one large vacation, mainly because we couldn’t bear the thought of staying in the house during the holidays.

How do I not end up as one of those people who goes broke in a few years?

This is an excellent question and, for the most part, my approach wouldn’t really differ from what I wrote before. Setting aside the emotional side of things (hard to do, I know) the underlying issues are quite similar.

First and foremost, I would take my time and avoid making any rash decisions. This is probably even more important in an emotionally charged situation involving the death of a loved one. There’s no need to make rapid-fire decisions.

From there, I would seriously consider paying off any outstanding debts. Consumer debt is a no-brainer, but I would also consider attacking any existing mortgage debt. Though I fully understand the arguments in favor of dragging out a low rate mortgage, I’ve never once regretted our decision to pay off our mortgage early.

Next up, risk. From Eliza’s message, it seems clear that she’s somewhat risk averse. And with this windfall, her need to take risk has almost certainly changed. She’s now sitting on a sizable nest egg and probably doesn’t need to take outsized risks to ensure her long-term solvency.

As for investing the money going forward, I have no idea if Eliza is a DIY’er by nature, but even if she’s planning on engaging the services of a financial advisor, I would suggest some self-education. These three books would be a good start:

In short (and imho), even if you’re relying on someone else’s advice to guide your decisions, you should put yourself in a position to critically evaluate that advice as it comes in. Nobody cares about protecting/growing your assets as much as you do.

In other words… Trust but verify.

And through it all, I would (personally) keep working — at least for awhile. This is especially true given what she has been through. If nothing else, going off to work each day will serve as a much-needed distraction. It also builds in another layer of financial security, at least until the dust settles.

Oh, and now that she’s sitting on a sizable portfolio, it probably wouldn’t be a bad idea to talk to an attorney that specializes in estate planning. This is especially true given that she has a couple of kids and might want to leave a legacy.

1 Chris @ Awesome Financial Future July 8, 2013 at 9:24 pm

Eliza, my heart goes out to you. The level-headed way you posed your question makes me confident that you’ll make the right decisions – and the sound and thorough advice that Michael provided makes me even more so. Since you have two sons, it might also be a good idea to review your own will to make sure that they’re provided for in the way that you’d want. It’s probably the last thing you want to think about, but just think of it as one less thing you’ll have to concern your self with once you take care of it. All the best to you. PS. I’m a *huge* fan of Bernstein’s The Four Pillars of Investing. If you only read one of the three recommended books, I’d suggest that one.

2 Martin July 8, 2013 at 11:18 pm

It is an interesting and sad story at the same time. Many times I thought myself what would I do if I win a lottery. Your advice to stay calm is great and hard to achieve. Many people immediately get the feeling that now they can afford everything and start buying stuff, which at first look may sound like they can easily afford it, but they do not realize that with that stuff they are also buying a future responsibility. I have read a story about a man, who bought a mansion out of his windfall, but all the up keeping costs broke his neck and five years later he was broke and in huge debt.

My plan basically is to invest the money into dividend paying stocks and live of the dividends only. And when making a purchase think about what other obligations I am buying with the purchase. Will I still be within the budget?

3 getagrip July 15, 2013 at 8:21 am

First off sorry for your loss. I had a childhood friend die a while back leaving a wife and young children and can sympathize with your situation.

IMHO it’s a bit different when someone has passed versus, say winning a lottery. Immediate family and friends aren’t generally encouraging you to go out and buy new things and celebrate. They may eventually get to that, but certainly their initial focus is about you and your loss. Also you aren’t as likely to have con men and con women sniffing around your door trying to fleece you since this is a private versus public windfall (though that doesn’t stop some so be careful of getting scammed).

So, that said the advice above is good. To add to it one of your best defenses is not to share the exact amount or keep those who know to a small group. Folks get weird over money. If they ask about financials, just say you and the kids are fine. If you want you could say if you’re careful there shouldn’t be an issue for college for the kids (focus is the money he left is for the kids and not for investment schemes or wild spending sprees or helping them or their child start a business). If they push more I’d politely push back on why they need to know, since the reality is they don’t.

I will also stress the provided advice about taking some time and recommend at least a year or so before really using the money or making decisions significant decisions other than eliminating debt. Provided there isn’t a serious financial need, there is no rush. My friend’s wife, between Social Security for the kids, her own job, and having no outstanding debt, was okay just leaving the money alone and is only now, two years plus down the road making significant changes. I feel you really can use the time to gain a bit of perspective on how your and your children’s lives will move forward.

Best wishes.

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