Spending your insurance pay out: To splurge or to save?

There have been many instances where people have received large sums of money from an insurance pay out and have blown it all unwisely. The TV series I Blew It shows a few examples of this and many have experienced this first-hand or seen family and friends go through the same. When there is little to no financial discipline, the chances of bankrolling a few good times and leaving nothing for later is probably higher than investing life, disability, or critical illness insurance pay outs wisely.

While a television series of this kind provides shocking insights as to how easy it is to lose R5 million in just a few months, it’s also easy to sense that money creates a sense of invincibility that cannot be further from the truth. According to research by a psychological support group, money doesn’t give or create real security in our lives. Rather, it provides feelings of validation, power, and control – a false sense of control that we have for the short time we can wield all the money we never had.

So, how can we use this money without being wasteful? The best thing to do when you receive a lump-sum in insurance pay outs is to hold onto it before making any significant financial decisions such as selling your home and buying a car. While it may be tempting to do just that, remember that the money you receive is meant to be in lieu of the salary that has been lost through a loved one’s death or your inability to work. Keeping a portion of the pay out in cash will allow you to cover bills and other pressing financial needs. Saving that money needed immediately in an account will incur fees and might, over time, cost you more. Instead, consider putting the pay out in a high-yield savings account to earn interest on the balance. 

If the family breadwinner passes away or becomes unable to work, set aside more in an emergency fund to keep the family afloat financially as others search for jobs. You can simulate a monthly salary by setting up debit orders from a savings account into a cheque account or by investing the pay out in an annuity solution. That way, the temptation to splurge is alleviated. 

There is also the option to take out either term or whole life insurance to protect your standard of living. Term cover protects you for a limited number of years, while whole life insurance provides lifelong protection. While term policies are cheaper in the short-term, they expire after the stipulated term as they are meant to protect your family while you are working. Whole life cover has higher premiums but doesn’t expire and can be used to generate wealth and to boost the family’s financial status in the future. 

Understanding these financial choices can help avoid situations where you make instant gratification purchases with that pay out, with little thought for the future. While it may seem like a wonderful idea to get that Ferrari you always dreamed of, it will only provide joy for the short-term while ensuring that you are comfortable can see you through the rest of your life.