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What to do with life insurance money

Jan 5, 2021 4 Minute Read

Most people buy life insurance hoping that they won’t have to use it (at least not for a long time). But if the unexpected happens, the payout from a life insurance policy is there to help.

If your loved one leaves you life insurance money, here are ideas for how to make the most of it.

How life insurance payouts work

If a person dies while their life insurance policy is active, it provides financial protection by giving a cash payout to beneficiaries of the policy. This money can go to one beneficiary or be split among multiple beneficiaries.

If you receive life insurance money, keep in mind:

  • It comes with no strings attached. You can use life insurance proceeds for anything you want: to pay bills; to cover your mortgage; to pay off student loans; or even to splurge on something your loved one would have wanted you to have, like a special trip. The only time you might be limited in what you can purchase is if someone has a lien or garnishment against you, such as back taxes or child support. Otherwise, it’s yours to spend as you like.
  • You don’t have to pay taxes on it. You don’t need to worry about Uncle Sam wanting part of your life insurance money, since it’s not taxed in the majority of cases. Most people take their life insurance payout in a lump sum all at once. That means that if your loved one has a term life insurance policy for $500,000, the life insurance company will pay the full $500,000. In some cases, you may be able to request to  receive your payment in installments. Keep in mind that this may require you to pay taxes on a portion of the payout, so talk to your life insurance company about the specifics.

What should I do with life insurance money?

Wondering how to invest life insurance proceeds? It’s often smart to wait a bit and weigh your financial decisions, especially if you are grieving.

Once you’re ready, your options for investing the life insurance payout include:

  • Pay off high-interest debts. The average American has about $90,000 in debt, including mortgages and student loans. If you’re wondering what to do with life insurance money and have student loans or credit card debt, the lump sum can help you make a bigger debt in those obligations and save on interest in the long run. If you do this, make sure that you’re also setting aside enough of the life insurance payout to cover your immediate needs, including your daily expenses.
  • Replace income. One of the main reasons people buy life insurance is to provide for their partner and kids if they die and can’t support them financially any longer. If you are in this situation, you can use the payout over time to replace your spouse’s paycheck. Talk with your financial advisor about the best place to put your payout if you’re going to spend it gradually.
  • Save for the future. Beyond your immediate needs, life insurance money can help you meet longer-term financial needs, like creating an emergency fund or saving for your children’s education. By setting aside the money now, you can potentially grow your investment to achieve your financial goals.

Whatever you do, you should claim your life insurance payout sooner rather than later. The life insurance company won’t issue your payment automatically, so you need to let them know about the death.

Still have questions?

We’re here to help. eFinancial works with top-rated life insurance companies to help you find the right coverage for you and your family. Call us or start your quote online today.


At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.