History tells us many things that are not always true going forward. Most of us only have our experience to go by when it comes time to make life-changing decisions. In more than 21 years of experience as a financial professional, I have seen that most of the time a husband passes away before his wife.
When both are the same age, men tend to die years earlier than women, so historically wives must plan on not having their husband’s income around as long as they might think. Add to that a traditional age difference between a husband and wife, and many times a woman can expect to live decades without her husband or his income. Just look at nursing homes today and see the 10-to-1 ratio of women to men.
So, what happens when the wife receives hundreds of thousands of dollars in life insurance? Does she treat it as if she won the Lotto? Will it be spent the same way that many people spend their gambling winnings or “found” money? Statistically, the money is spent in less than a year, regardless of the dollar amount!
If you are the beneficiary of your spouse’s life insurance, you have to keep a few things in mind. First, the money you receive from life insurance is income tax-free. Therefore, what you see is what you get to keep. Second, accidental life insurance is not the same as regular life insurance. An accidental death policy is nearly worthless if you are insuring someone past the age of 60. Those policies pay out only in the case of a covered accident. Agent friends of mine used to joke that you had to be “hit by a blue truck, on a Tuesday, wearing a pink shirt” in order for the policy to be worth its face amount.
Third, have a plan. I have had many clients who have received $1 million tax free as death benefit proceeds. The recipients have always been women. If they had a plan and good financial habits prior to the death, then they usually did well.
The money is not a lifetime stream of income. It is usually a one-time payment that has to be managed as if there is only an amount of 4-5 percent available as an annual withdrawal rate. That means for every $1 million dollars in life insurance proceeds, you should expect to spend no more than about $50,000 per year. If this is the main source of money you expect to receive when your husband dies before your retirement accounts have reached a certain level, make sure you have enough regular life insurance to ensure you can live the lifestyle you want to live for the following 20 or more years.
Arif Halaby is a Certified Estate Planner in California and President/CEO of Total Financial Solutions, Inc., a financial and insurance services company in Santa Clarita that prides itself in protecting principal, eliminating fees, and designing higher income strategies. 661-753-9683