What to do with life insurance pay out?

beccad

A bit of background: I have stage 4 cancer (although not planning on going anywhere any time soon!) and we've submitted the relevant forms to our life insurance company. I'm married, two small children (daughter aged 2 and son who's six months). Mortgage circa £210k. Debts of about £10k. Neither my husband nor I have any pensions to speak of - I've got a couple of small occupational pensions but not worked since I had my daughter. Husband is self-employed.

We have an IFA who we know well and trust so will be seeking his advice too. Assuming the insurance pays out we'll pay off the debt obviously, but not sure what to do with the rest of it. Currently I have no income aside from child benefit, husband's income is about £35-40k per year. Because I don't work we have no childcare costs. This could change given the circumstances of my illness. We would want to put some money in trust for the children, but I think it'd be useful to invest the money in such a way that my husband can draw down an income.

Clearly we'd rather not be in this situation at all, but such is life. My head hurts thinking about having such a large sum of money to think about!

Your_Hero

Sorry to hear of your situation.

You did not mention how much life cover we are talking about here. As you mentioned, first priority is to pay off debts which would free up income. This would give your husband some flexibility in work and even if he chooses to work 1 or 2 days less (and therefore less income), it may not matter since the outgoings are also less.

If this is not possible, and he needs a childminder, the costs can be quite high and it would depend exactly what your monthly expenses will be to decide what to do with the proceeds (and how much the pay out will be of course). Your IFA will be able to advise you.

atush

We have a a life policy we took out on my life when the children were small. What we planned, was that my husband would take the proceeds, and invest them so the income would pay for child care. And the capital would be inherited/invested for the children once he no longer needed child care ie when they were in their teens.

putting some into a pension would boost if by TR, but as you aren't currently working, this would only be a small amt.

Make sure all accts are joint, or any such as ISAs that cant be he has.knows where the paperwork is. And check your old occupational pensions to make sure that you have filled out expressions of wishes forms.

Good luck with your ongoing treatment, and fight for any life extending drugs if you are turned down. Consider using a portion of your LI to fund this if necessary.

jamesd

Much of what should be done will depend on the amount that will be received. It may be sufficient to allow him not to work but instead to become a full time parent for the children, either indefinitely or until they have both started school. As a very rough idea it takes about £20 of capital per £1 of desired income for life, so £20,000 of income would need £400,000 insurance payout. Initially much of that would be taxable but it would gradually change to being tax free within an ISA as the annual allowance is used to move the money within one.

It's likely to be tempting to pay off the mortgage but it's also usually less good to do that than it is to take an ongoing income from the money and use that to make the mortgage payments. This is because the returns available from investments is normally higher than all but the highest mortgage interest rates. An IFA may suggest paying off the mortgage if you indicate that you have low risk tolerance for investments.

Risk tolerance for investments is about the ups and downs. They work like a rollercoaster in reverse and each person has s different tolerance for how much they can stand in the way of dips along the way to the higher overall result. To give some idea, the main UK stock market drops by about 20% two or three times a decade and by 40% once or twice a decade. Someone who couldn't deal with drops that deep would include other investments that drop less, like commercial property funds or corporate bonds to reduce the depth. Being unwilling to accept an overall drop of less than about 20% would start to seriously reduce the income that could be taken, 30-40% maximises it.

Your husband will have the right to request flexible working hours though not all employers could accommodate this. He already has that right to help deal with the burdens that come with your situation. Some employers can be very helpful with things like agreeing to part time working on two or three days a week until the children are both of school age, then hours around when they are at school. Others less so. He might also consider a leave of absence for a while, unpaid, to help deal with the inevitable transitions and to be around more when the children will most be in need of his presence. Discussing options with his employer is a good idea because that helps with planning.

beccad

The pay out is equivalent to the remaining mortgage amount I think.

jamesd

It's pretty common to take out life insurance for the mortgage balance so you're probably right. It's particularly common to choose that amount when a couple don't yet have children, since it leaves the survivor without a mortgage and able to work to provide their income.

A £200,000 lump sum could provide about £10,000 income for life but over shorter time periods like until the children go to school it can pay out much more. It can also be useful to help to pay the cost of child care. With that sort of amount what an IFA will do is help to work out the financial planning for how long the money can support the various options for time off work, childcare and such. Your husband should be left in a decent financial situation for doing things like staying at home for a while then going part time after adjustment time and eventually full time.

usefulinfo

It looks to me as though the OP is submitting a terminal illness claim. That would change the situation somewhat. They may not see a full payout - it may be minus the remaining premiums.

Is this what you mean? OP? Are you claiming now?

xylophone

I've got a couple of small occupational pensions

In view of your situation, have you contacted the Trustees?