Should You Invest Your Life Insurance Payout?

Here's why it could be a good idea.

People often purchase life insurance in the hopes they'll never need it. But in some cases, life insurance becomes necessary. And if tragedy has struck your family, you may be on the receiving end of a large sum of money from a life insurance company.

The question is: What should you do with that cash? You could stick it into your savings account, where it can earn some interest. Or, you could consider investing it.

The latter option may seem risky. But here's why it actually makes sense.

You might as well put that money to work

Most people are advised to get enough life insurance to replace their salary 10 times over at a minimum. So, let's say you just tragically lost a spouse who was your family's sole breadwinner and brought home $100,000 a year. You may now be sitting on a $1 million life insurance payout.

But chances are, you don't need all of that money at once. Even if you have to pay off some medical bills and cover the expense of a funeral, you might only make a small dent in that $1 million payout initially. And so it pays to invest a portion of your payout -- any money you don't expect to need within five years or so. That way, you can grow that money into a larger sum, which should, in turn, give you more options for covering expenses as needed.

Get help investing your life insurance payout

If you've never so much as picked a stock or opened a brokerage account, then investing a large sum of money is something you probably don't want to do on your own. A better bet may be to enlist the help of a financial advisor -- ideally, one who charges a fee that's a percentage of your assets under management.

A financial advisor can sit down with you and help you map out an investment strategy based on your needs and goals. Maybe you're willing to return to the workforce now that you're the sole surviving parent in your household, but you only want to work part-time so you can continue to be there for your kids. An advisor can take that into account when choosing your investments, as well as factors such as your existing debts (like the mortgage on your house) and long-term goals, like being able to give your kids some money to pay for college.

To be clear, it's never a good idea to invest funds you think you might need within a few years. Investing every dollar of your life insurance payout may not be the best way to go unless you have enough savings to cover several years' worth of bills.

But you may want to consider investing half of your life insurance payout, or one-third. Doing so could help ensure you're left with even more income all-in -- and that your family is further protected, financially speaking, in the wake of an unspeakable loss.