What widows should do with life insurance money

do with life insurance


100818 RGT Headshot SmileThis is a guest post from my friend Russ Thornton, a fee-only financial planner who specializes in helping women powerfully deal with change.  If you’re ready to gain control of your financial life, you can take Russ’ free email course to learn how to navigate change with confidence.


If you’re a recent widow, you have had to deal with an enormous amount of challenges:

The emotions. The conversations. The decisions.

But with time, the grief begins to loosen its grip on you, and you need to consider moving ahead in your new life for your own happiness. In the meantime, you must make many financial decisions, including what to do with life insurance benefits.

What widows should do with life insurance money

Assess your finances 

Depending on the size of the life insurance policy payout, your options and alternatives could be few or many.

Let’s assume you’ll receive $250,000 tax-free cash from a life insurance policy your husband had established for your care after his passing. How do you handle this financial issue?

First step: Understand your financial situation. What assets and liabilities do you have? Maybe you own a home, have some savings and investments, two cars, and some miscellaneous personal property.

But what do you owe?

This is often the best place to start when evaluating your options for a life insurance check.

Let’s say you owe $150,000 on your home mortgage. It may make sense to take $150,000 of your $250,000 life insurance check and pay off the mortgage.

While that takes away 60% of your available cash from life insurance, it also eliminates your mortgage and any associated mortgage payment, freeing your monthly cash flow and potentially saving you tens or hundreds of thousands of dollars on mortgage interest.

Also, there is a non-financial benefit to reducing or eliminating debt. Many clients tell me they feel peace of mind knowing their home is paid off and the fact that they don’t owe anyone anything.

It doesn’t always make sense to pay off debt. 

What if you want to pay off your mortgage or other debt, but your total debt is equal to or greater than the amount of the life insurance check?

Then you need to consider your how easily you can access your other investments and savings.

It doesn’t make sense to spend all of your life insurance cash to reduce your debt when you have little other liquid savings. If you pay off your debt but have to use credit cards to get through the next few months, you’ve actually done more harm than good.

For example: If you pay off a mortgage at, let’s say, 5% interest, but then have to turn around and use a credit card at 14% interest, you’ve exchanged secured, low cost debt for unsecured, higher cost debt.

Instead, if your total debt meets or exceeds the amount of cash you’ve received from life insurance, don’t rush to pay all your debt off. Instead, start with your debt with the highest interest rate, and hold onto some cash for living expenses and other needs going forward. This insurance then servers as an important emergency fund.

Other considerations 

After you’ve addressed debt, consider other uses for this cash.

Many women I work with want to remodel their homes. Some women want to downsize to a smaller home. Others want to move to another area or even another state to be closer to children and grandchildren.

There’s nothing wrong with these choices, as long as you don’t outspend your budget. Seek the advice of a realtor familiar with homes in your area so you don’t go overboard with home improvements that may be too far out of line with other similarly priced homes in your area. Otherwise, you could have a hard time getting a return on your remodel investment if you sell your home in the future.

Other potential uses for the life insurance check could include long-term care insurance, gifting to family or organizations, or setting funds aside for future travel.

There is no right or wrong when it comes to how you spend money from a life insurance policy. But every widow would benefit from making these decisions in the context of a personalized, comprehensive financial plan.

Once you’ve explored, goals, values and priorities, you can begin to understand the tradeoffs between decisions you may be considering and make more informed choices that will work for your finances and your lifestyle.


Emma Johnson

Emma Johnson is a veteran money journalist, noted blogger, bestselling author and an host of the award-winning podcast, Like a Mother with Emma Johnson. A former Associated Press Financial Wire reporter and MSN Money columnist, Emma has written for the New York Times, Wall Street Journal, Forbes, Glamour, Oprah.com, U.S. News, Parenting, USA Today and others. Her #1 bestseller, The Kickass Single Mom (Penguin), was named to the New York Post’s ‘Must Read” list.

Emma regularly comments on issues of modern families, gender equality, divorce, sex and motherhood for outlets like CNN, Headline News, New York Times, Wall Street Journal, Fox & Friends, CNBC, NPR, TIME, MONEY, O, The Oprah Magazine and The Doctors. She was named Parents magazine’s “Best of the Web,” “Top 15 Personal Finance Podcasts” by U.S. News, and a “Most Eligible New Yorker” by New York Observer.

A popular speaker, Emma presented at the United Nations Summit for Gender Equality. Read more about Emma here.

2 thoughts on “What widows should do with life insurance money

  1. Thanks for the advice. It is good for both widows and widowers. It is helpful to think of what to do in the case of a windfall (desired or not).

    One piece of advice that I was given when my wife died is not to make a major decision in the aftermath of a traumatic event (for me, my wife died out of the blue). It was good advice for me.

    1. I agree Tony, and think you were given sound advice. It’s not wise to make any major decisions in the immediate aftermath of losing a spouse given the emotions that need to be dealt with.

      However, at some point, after a reasonable amount of time, decision will need to be made. Unfortunately, I’ve seen some widows become paralyzed and essentially refuse to address issues, some of which are time sensitive.

      There is no one-size-fits-all advice when it comes to recovering from the loss of a spouse, but after giving yourself time to grieve and adjust, everyone needs to find their own path forward.

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