Instead of keeping a large sum of money idle, consider investing it for the long term. It is wise not to waste money on term insurance. Spending too much money can lead to financial instability in the long run.
It is a moment of mixed emotions when you receive a large insurance payout after the demise of a family member. While this money can provide financial security during that challenging period, it also comes with certain responsibilities that are important to understand. Managing a large term insurance payout wisely is essential to ensure long-term financial well-being. Let us discuss here how to manage a significant insurance payout after the death of a family member and the do’s and don’ts.
What to do if you get term insurance money
Prioritize immediate needs
Immediately after a major loss such as the loss of a family member, make sure you allocate funds for essential expenses. This includes covering the funeral and related costs, settling outstanding debts, and ensuring that your family’s day-to-day needs are met.
Create an emergency fund
Immediately set aside a portion of your term insurance proceeds as an emergency fund. This fund acts as a financial cushion against unexpected expenses and emergencies, providing peace of mind during challenging times.
If there is any outstanding loan, repay it immediately.
If there is any outstanding loan or debt, give priority to repaying these debts. This not only provides financial relief but also prevents interest from accumulating.
Consult a financial advisor
It is advisable to consult a financial advisor in case of a large sum received against term insurance. According to ICICI Direct, this can help you create a comprehensive financial plan taking into account your family’s specific needs, objectives and the tax implications of your actions.
Diversify investments
Instead of keeping a large sum of money idle, consider investing it for the long term. Diversify your investments across different asset classes such as fixed deposits, mutual funds, stocks and real estate to minimise risk and achieve financial growth.
Review and update your will
Take this opportunity to review and update your will and estate planning, ensuring that your estate and insurance policies are structured to benefit your chosen beneficiaries.
Consider tax planning While
proceeds from term insurance are generally tax-free under Section 10(10D) of the Income Tax Act, other financial decisions may have tax implications. Consult a tax professional to understand the tax consequences of your financial actions and optimize your tax position.
Do not do this if you get term insurance money
Avoid making any financial decisions impulsively
without doing any long-term planning. Take the time to plan carefully and weigh your options.
Don’t ignore tax planning
While term insurance proceeds are generally tax-free, other financial actions may have tax implications. Ignoring these aspects could lead to unnecessary tax burden.
Do not spend too much
According to ICICI Direct, it is wise not to spend wastefully with the term insurance money. Spending too much money can lead to financial instability in the long run.
Don’t neglect ongoing life insurance needs
If the deceased family member was the primary earner, don’t overlook the need to purchase new term life insurance to ensure financial security for your family in the future.
Don’t keep financial matters private
Avoid hiding details of insurance policies and financial matters from family members. Open communication is important to ensure that everyone understands the financial situation and can take appropriate action.
