The loss of a loved one is a devastating period of time. The effects of grief and the change of lifestyle may carry on over several months and years, leaving you vulnerable emotionally and mentally. Even with life insurance, deaths are often accompanied by matters that require immediate financial attention. These could include paying for funeral expenses, paying off medical bills, handling investment or retirement accounts, and understanding your Social Security benefits. When you are on an emotional roller coaster, it can be a challenge to make the right financial decisions that will take care of you for the long-term. In addition to learning how to live off of a budget with a single source of income, you need to be careful of avoiding scams or other decisions that would exploit your limited funds. There are several key action steps that you can take to help protect your finances when you love a spouse.
Step One: Update Financial Accounts
After your spouse passes away, you may inherit all of the funds in their financial accounts. Typically, when accounts are opened, there will be two names listed on the account to fill the need for the “right of survivorship.” When a co-owner on the account dies, the surviving owner takes sole ownership of all the funds. You need to contact any financial institution where your spouse had an account to have the registration changed to your name. You will probably be required to provide the institution with a copy of the death certificate before changes can be made. However, it there is any loan or credit card debt associated with the account, any remaining funds are usually put toward the outstanding balance before another administrator is allowed to take ownership.
Step Two: Roll Over or Divide Retirement Assets
There are different rules for handling retirement or pension account assets when it comes time to shift the ownership from one spouse to another. When the account owner passes away, the retirement account assets will pass directly to the beneficiaries that were designated on the account. Though this is usually the spouse of an account holder that was married, there are times when the designation has been left to the person’s estate.If this is the case, all the funds get transferred into distribution with the estate first, often resolving any outstanding debt before the funds can be used. This is why is important to make sure all beneficiary designations are kept current on your retirement accounts (IRAs, 401k, and/or 403b). Even if you have a will, the beneficiaries listed on the original paperwork supersede any will designations.
For an IRA, the surviving spouse is generally the party that receives the deceased’s assets. When you inherit an IRA and roll it over to your own account, you will be required to take the minimum distributions (RMDs) from the account whenever you turn 72. If you choose not to move the money into your own IRA, you could be faced with an early withdrawal penalty if you aren’t over the age of 59. Rolling it over saves you from this deduction, letting your money grow tax-deferred for as long as you can.
Step Three: Adjust Your Budget
When your spouse passes away, you may find yourself with less stability in your income. You will need to adjust your budget to account for the loss of funds. Make one list of all the essential expenses and another list of all the discretionary expenses. Your essentials include housing (mortgage/rent), food, transportation, insurance, utilities, etc., while discretionary would include clothing, vacation, dining out, cable, etc.
Have a list of your reliable sources of income and match them to your essential expenses. Reliable sources of income include salary, pension, Social Security, etc. If you don’t have enough left over for your discretionary expenses, you may need to look at trimming some of these items in order to save your financial health and protect your credit score. When finances get tight, it becomes more important to continually monitor your credit to see how your bill payment strategy is affecting you. Financial institutions can order a credit check for loans and financing needs or visit crediful.com, but you can also use a web-based program to keep an eye on it yourself. If you are close to retirement and are worried about an income shortfall, then you may want to purchase an income annuity.
Step Four: Evaluate Your Insurance
In the event of a death, life insurance is generally what pays for the expenses with the funeral and burial. After these are paid, the surviving spouse or beneficiary that has been designated will receive the remaining funds tax-free. For spouses that will still have children to care for after the death, you should consider purchasing your own insurance policy of increasing the coverage you have to protect them in the event that you may pass away. You may also need to purchase a health insurance plan, especially if your spouse had carried the coverage prior to their passing. While you can use COBRA to keep these benefits for another 36 months, these premiums are expensive with some being about 102% cost of the plan.
You will need some time after the passing of your spouse to adjust both mentally and emotionally. If you have a trusted friend or family member, they can help you sort through the paperwork needed to make sure your finances are in order. You will need the resources to live independently, and while it may be lonely and an adjustment, a strong financial situation can make it easier.