What Is the Best Way for a Widow to Use Life Insurance Proceeds?

There are many options, but the best use of the money is different for each widow and her unique circumstances.

A woman wearing all black sorts through some financial documents.
(Image credit: Getty Images)

The loss of a spouse is one of the most stressful events a person can experience. With it comes a whole host of emotions that can be overwhelming for the bereaved. Hopefully, life insurance is one thing that was put in place to allow those remaining to process their loss without fretting over their finances.

The lump-sum life insurance offers can cover immediate significant expenses as well as long-term costs that might be hard to afford because of lost income. Life insurance is also typically one of the first assets transferred to the beneficiary after a death.

According to Robert Steele, partner and head of the Trusts & Estates Department at Schwartz Sladkus Reich Greenberg Atlas LLP: “Life insurance death benefits can be paid within 30 days after you submit a claim. In order to submit a claim, you will need a certified death certificate, which is generally issued in less than a week by the funeral home.” Steele advises widows to order plenty of copies — while it varies, consider 15 as a ballpark — because ordering extras later can take much longer.

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On occasion, Mr. Steele has seen death benefit claims paid in as little as two to three weeks. Steele advises, “The secret is to file the claim with the insurance company in a timely manner. Submitting a certified death certificate and double-checking to make sure the claim form is both complete and error-free is also key.”

Once the life insurance proceeds are received, a new question may arise. How should one use the funds? There are many options, but the best use of the money is different for each widow and her unique circumstances.

Funeral Costs

In 2021, the average funeral cost ranges from $9,500 to $12,500, according to the National Funeral Directors Association. However, standard funeral rates are increasing, and many can reach prices of $30,000 or more. Using life insurance money to cover these costs can significantly decrease the financial strain on you.

Ongoing Expenses

When your spouse dies, your living expenses do not stop, and often your income is reduced. According to the Women’s Institute for a Secure Retirement (opens in new tab), after the death of a spouse, household income generally declines by about 40% due to changes in Social Security benefits, spouse’s retirement income and earnings.

Your mortgage, car payment, utilities, food, clothing and health care premiums are all part of your monthly budget that need to be paid on this reduced income. The death benefit from a life insurance policy can help provide the funds you need to help cover these expenses.

Debt Payoff

You are generally not personally responsible for paying off the debts of your husband, as long as they are in his name alone. That includes credit card debt, student loans, car loans and business loans. Instead, debts will be paid by his estate. When an estate does not have enough funds to pay all the debts, any gifts that were supposed to be paid out to beneficiaries will most likely be reduced.

However, you may be responsible for certain types of debt, such as debt that is jointly owned or a loan that you have co-signed.

It is essential to understand the laws of your state so that you know where you stand concerning all debts. Some states that are Community Property states hold you responsible for the debt even if it is not in your name. Talking to an estate-planning attorney can help you understand what obligations you have so that you can plan appropriately.

Build an Emergency Fund

Life insurance proceeds can help build a liquid emergency fund, which should cover three to six months of expenses. Avani Ramnani, a Certified Grief Coach and Certified Financial Planner®, suggests, “You will want to err on the side of having more in your emergency fund than less, as you no longer have a partner whose income can provide an additional cushion to financial shocks.”

“Suppose both of you were retired and living off Social Security, with supplemental withdrawals from your portfolio. In that case, it makes sense to have at least six months of living expenses on hand in your emergency fund,” Ramnani shares. “This extra cash will protect you against liquidating any stocks at a loss because of a temporary stock market drop.”

Supplement Your Retirement

When a woman loses her spouse, she becomes much more vulnerable to poverty. According to the Women’s Institute for a Secure Retirement, the poverty rate for all women (whether married or single) 65 and older is roughly 12%, meaning that just over 1 in 10 live in poverty. But for widowed women 65 and older, the poverty rate is much higher, with approximately 51% living on less than $22,000 a year.

So how much will you need to retire? That depends. A quick rule of thumb is you will need 80% of your preretirement income to live comfortably. For others you'll need more than that — that is if you plan on increasing your spending on vacations. Many women also find that they spend more in retirement because of higher medical costs.

If you are still working, be sure to max out your employer’s retirement plan, IRA or taxable brokerage account. However, it is nearly impossible to save and make all the money you need for retirement yourself. You can bridge the gap by investing your money in the stock and bond market so that your portfolio grows for you over time. Investing in the market will help you reach your long-term financial goals.

Education

If you are a young widow, the life insurance proceeds can be wisely invested in paying for the cost of going back to school to augment your earning abilities. Another option would be to use these funds to cover the cost of college for your children. Even if you started a 529 college savings plan with your husband, you most likely do not have enough money to cover the cost of college. The death benefit from your husband's life insurance policy can provide additional funds to increase the balance of your 529 plans.

However, Ramnani cautions widows, "Here's a message that all young widows need to take to heart: You should only save for college educational costs after your retirement savings is secure. When it comes to savings, it is OK to put yourself ahead of your kids. Having parents who cannot pay their retirement expenses will likely be more of a burden for your children than any college loans they may need to pay off."

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Stacy Francis, CFP®, CDFA®, CES™
President & CEO, Francis Financial Inc.

Stacy is a nationally recognized financial expert and the President and CEO of Francis Financial Inc. (opens in new tab), which she founded 15 years ago. She is a Certified Financial Planner® (CFP®) and Certified Divorce Financial Analyst® (CDFA®) who provides advice to women going through transitions, such as divorce, widowhood and sudden wealth. She is also the founder of Savvy Ladies™, a nonprofit that has provided free personal finance education and resources to over 15,000 women.