Lost earning member of family? Here's how you should use inherited money

The sudden demise of a loved one leaves behind a vacuum that can never be filled. If the deceased is the prime earning member,  the family needs to deal with the additional burden of the loss of income, too. When going through both an emotional and financial crisis the first thing that the family should keep in mind is to not make any hasty decisions. This is because from insurance proceeds to retirement benefits, one could suddenly find oneself in charge of a large sum of money without any knowledge of how to deal with it.

As one moves forward it is important to understand how to use the money so that long term financial goals and living standards are not compromised. In such a scenario it is important for a family not to rush through things but take a planned approach.

“Demise of a loved one in any family brings very difficult time and especially if that loved one is the breadwinner. This is why it is extremely important that life insurance features in every individual’s financial planning and portfolio creation. This will ensure that the financial concerns that may arise in case of the unfortunate demise of the breadwinner can be addressed. However, even if adequate insurance is purchased, it’s extremely important to decide how to use the insurance money so that the goal of maintaining living standards of the family are not compromised,” said Akshay Dhand, appointed actuary at Canara HSBC OBC Life Insurance.

Here are a few steps one should immediately take after receiving inherited money:

Take stock of the situation

The first step should be to collect all financial information about the deceased family member at one place. After you know how much money is in your hands you need to segregate based on their liquidity level to meet your future requirements. For example, for immediate needs, fixed deposits can be considered over equities and real estate.

“To start with, nominees or legal heirs should first take stock of all the investments and source of incomes. Further, segregate the moveable, immovable and liquid assets. Once they have a clear idea of the assets – be it investments, properties, bank deposits or insurance claim proceeds, then they need to have an understanding of the liabilities and also of the money that would be required to meet the family expenses over time,” said Rishad Manekia, founder and MD, Kairos Capital.

Outstanding Loans

One of the biggest points of worries could be outstanding loans in the name of the demised member. With no regular income insight, these loans can be a huge burden on the family. In the case of a bank loan always check with your bank, as a loan usually comes with a term insurance plan so that the outstanding balance remains covered throughout the tenure of the policy.

“Check with your lender about the home loan insurance which is a single payment policy and is taken at the time of taking a loan. This amount can be used by the nominee to repay the outstanding debt,” Kshitiz Mahajan, co-founder of Complete Circle Consultant told Money9.

“When checking outstanding loans, they must evaluate if there is sufficient cash flow to pay off dues. However, if the funds are not sufficient, then they might have to sell off assets or work with the lender to find an acceptable solution,” said Manekia

Regular Income

One of the challenges, when a primary earning member dies, is to arrange for a regular income to meet the daily needs of the family. In such a case, people with a low-risk profile can invest in fixed deposit for earning regular interest or can invest in mutual funds with an option of a systematic withdrawal plan. Under SWP one can withdraw every month from a mutual fund without attracting high taxes.

A well-diversified portfolio of investments helps a family in earning a steady source of income for regular day to day expenses. “The next thing to look at is to set aside a corpus that can take care of emergencies and also ensure that investments are made that can give regular income to take care of expenses over time. Investments in mutual funds can take advantage of the Systematic Withdrawal Plan (SWP) to ensure a fixed withdrawal amount at regular intervals. If this is too much to handle, take the help of a financial planner, who can help you to through this situation,” said Manekia.

Child Education

After paying off debts and assuring a steady flow of income, if possible, one should also set aside money for funding child education. “Part of the money should also be kept aside for building up a corpus of wealth for future events such as children’s education, marriage or any other important event expected to occur in the future for which significant financial outgo would be needed,” said Dhand.