How to invest Life insurance

[sandandsea]

What would you do in this situation? Please don’t quote as I’ll delete details later. (Deleted details) I’m looking for advice for someone else.

How would you invest the life insurance?
Start 529s? Stock market/index fund? Pay off the house? Something else? Some split of the above?

So far I’ve only advised to not do anything for at least a few months, ideally 6, to give time to heal and get your footing back.

[sadlebred]

I'd look at meeting with a fee only financial planner to help guide you with any investments and what the smartest decisions would be.

[oswin]

I think it really depends on the specifics of their budget, so it's hard to say for sure. Income loss of $30k can't be replaced indefinitely by that amount, but it can cover most of it until the kids are in college. I would probably invest everything that I wasn't planning to spend in the next 3 years, so either $390k (3*30+20) or something similar, in an index fund like VTSAX. Maybe 60/40 or 70/30 VTSAX and VBTLX (bond fund) for lower risk. Potentially I would set aside a little extra for 529s, but nothing huge, probably $10k each.

Again, the real question is whether they'll need to replace the full $30k or even more (e.g. for after school care). If I was planning to spend it all within 10 years, I would definitely lean more conservately on the investment mix. I'd probably plan to use any amount that was left when the oldest was ready for college to pay off as much of the mortgage as possible, since a paid off house doesn't count for financial aid but $200k in investments would.

[jamaicam]

I didn't have that large an insurance payout but the main thing I did was paid off our house and moved to somewhere more manageable - both in terms of size and costing. I wanted to minimise our outgoings on a monthly basis as that made me feel financially more secure than money in investments did. I allowed myself that for my peace of mind, even if it wasn't the 'right' thing to do financially - my mortgage interest rate was lower than what I could have got in investing.

Both of us worked full time so we already had childcare costs so those didn't increase by much at all. However, one thing I needed to do was not go after promotions for a while or take on extra work (I used to teach students on a work related course outside of work hours which I stopped doing). So plans based on promotions or additional earnings were affected.

And I completely agree with your advice to do nothing major right now. I gave myself a year before making any major decisions. Yes, I started planning and looking in that time, but I didn't take any firm steps.

And finally, as someone who has been there (and is still there), tell her it completely sucks. It is awful. But she will find out that she is so strong through this. And her kids will constantly amaze her.

[farmvillelover]

I am so sorry for their loss. Unfortunately I see this a lot in my job.  

Given your added detail, I would personally do the following:
- 50k for each child in a 529. Personally in a Utah 529.
- 200k pay off house (I know this is unpopular but given the scenario that's what I would do).
- 250k dollar cost averaged into a taxable brokerage account.  Vanguard or Fidelity.  I'd likely do a blend of index funds in 70% total market index fund, 20% international index fund, and 10% cash/bonds.  Obviously adjusted for his/her risk tolerance.

Won't the children be getting social security benefits from their parent's death? I would think those funds would go towards paying for the added help they would need (after school sitters, activities, etc).

Are they also in CA?  The surviving parent should also be sure to get their estate planning documents in order if they haven't already.  And REMIND THEM if they ever remarry, they have to amend their documents to reflect the new spouse.  I would also make sure they update their current beneficiary designations on IRAs, 401ks and life insurance, since their deceased spouse was probably the primary beneficiary on all of those things previously.