Q: I just received $300,000 from a life insurance policy. The money is currently in a retained asset account, drawing 1 percent interest. What should I do with this money? I work full-time so I have income.
A: You should probably approach this as a three-step process:
- Get the proceeds into a bank savings or money market account as soon as possible. Retained asset accounts are vehicles that insurance companies use to house insurance policy proceeds until the beneficiaries decide what they want to do with the money. There has been some controversy over the fact that insurance companies can profit from holding this money in the meantime, but that's not why you should switch to a bank account as soon as possible. Unlike savings accounts or money market accounts, retained asset accounts typically are not FDIC-insured, even if a bank happens to be providing administrative services on the account. If you shop for the highest savings or money market rates, you should be able to find rates competitive with the 1 percent you are now earning, plus you will have the comfort of FDIC insurance. However, in order to maximize this protection, which is capped at $250,000 per depositor per institution, you may want to split the money between two different banks.
- Check with an accountant to see if there is any tax liability on the money. Life insurance proceeds may well be tax-free, but you will want to make sure before you start making long-term plans for the money.
- Make long-term plans for this money. Once the money is safely in a bank and you know whether to keep any of it aside for tax purposes, you can start making some long-term plans. Even if you had previously set financial goals, this sudden addition to your wealth might change them. Think through what is important to you, whether it is paying off debt, putting a down payment on a house, funding education, or saving for retirement, and decide how to allocate this money towards those goals. Most likely, you will then want to move at least some of the money out of your savings or money market account, and into longer-term investment vehicles. Knowing specifically what the money is allocated for will help you know what types of investment vehicles to consider, so you can then focus on finding able and reputable providers of those products.
Your payout is enough to really jump-start a retirement savings program, and as described above, you can use it effectively toward other goals as well. Just remember that this type of lump sum does not come along very often, so be sure you use it purposefully and wisely.
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