Can you use life insurance money for anything?

When a loved one passes away, it can be an extremely difficult time, both emotionally and financially. Life insurance policies are designed to provide financial support to your beneficiaries after you die. The funds from a life insurance policy can be used for a variety of purposes to help your family in their time of grief.

What is life insurance for?

Life insurance is intended to provide a financial safety net for your loved ones in the event of your death. The policy holder pays premiums on the policy while they are alive, and the death benefit is paid out to the listed beneficiaries when the policyholder passes away. This ensures your family has access to funds to cover expenses like:

  • Funeral and burial costs
  • Existing debts and bills
  • Daily living expenses
  • College tuition
  • Mortgage payments

Having life insurance means your family will have one less financial stress to worry about as they grieve and deal with your loss.

Who gets the life insurance money?

The beneficiaries listed on your life insurance policy will receive the death benefit payout after you pass away. You get to choose the beneficiaries, whether that is your spouse, children, siblings, parents, or a combination. You can split the benefit amount between multiple beneficiaries in whichever percentages you prefer.

Beneficiaries can use the payout however they see fit, whether that is covering funeral costs, paying off debts, or funding their education. There are generally no restrictions on what beneficiaries can use the money for, unless stipulated in your policy documents.

Using life insurance for funeral costs

One of the most common uses for life insurance money is covering funeral and burial expenses for the deceased. Funerals can be quite expensive, costing thousands of dollars even for modest services. A life insurance policy provides an immediate influx of cash your family can use to pay for:

  • Funeral home services
  • A viewing and service
  • Burial plot and headstone
  • Cremation costs
  • Transportation of the deceased
  • Flowers and obituary notices

Having this money available right away helps ease the financial stress of arrangements during an already difficult time. It can cover all upfront costs so family is not stuck with high funeral bills after losing a loved one.

Paying off debts

Another very common use of life insurance proceeds is paying off any existing debts the deceased held. This may include debts like:

  • Credit cards
  • Car loans
  • Personal loans
  • Medical bills
  • Mortgage

Settling outstanding debt balances helps provide a fresh start for surviving family members. Paying off large debts like a home mortgage can even allow beneficiaries to remain in their family home if that is their preference.

Everyday living expenses

Losing a loved one often means losing their income and financial contributions to the household. Life insurance benefits provide funds that can be used to cover everyday living expenses to maintain your family’s standard of living, such as:

  • Housing costs like rent or mortgage
  • Utilities like electricity, heat, and water
  • Groceries and household necessities
  • Transportation costs like car payments and insurance
  • Child care and education fees
  • Medical expenses and health insurance

For surviving family members who depended on the deceased’s income, life insurance can help bridge the financial gap at a time when finances may be strained.

Funding higher education

Many parents and grandparents purchase life insurance policies to help provide for their children’s or grandchildren’s college education in the event of their death. Proceeds from a life insurance policy can be used to pay for expenses like:

  • Tuition and fees
  • Room and board
  • Meal plans and dining fees
  • Textbooks and supplies
  • Technology costs
  • Transportation

This can provide financial security to children who may otherwise be forced to take on significant student loan debt to pursue higher education after losing a parent. The funds can cover 4 years of undergraduate university or potentially even more years for graduate studies.

Making mortgage payments

Maintaining mortgage or rent payments is often a top priority for surviving family members, but can be difficult if the deceased’s income covered a significant portion of housing costs. Life insurance benefits can provide funds for making monthly mortgage payments or rent, allowing the family to remain in their current home.

For homeowners with mortgages, life insurance money may also be used to pay off the remaining home loan balance completely. This removes the monthly mortgage obligation entirely, though beneficiaries will want to consider if it is better to continue making payments over time rather than depleting the full life insurance amount right away.

Starting a business

Some beneficiaries may opt to use their life insurance proceeds to start a small business in honor of their loved one. The funds provide startup capital that can be used for expenses like:

  • Registering a business name and establishing a legal business entity
  • Obtaining business licenses and permits
  • Renting retail or office space
  • Purchasing inventory and supplies
  • Buying furniture, fixtures, and equipment
  • Funding initial marketing efforts
  • Covering early operating expenses and payroll

Starting a successful business takes a lot of work, but the influx of capital from a life insurance payout can help turn a dream into reality.

Charitable giving

Some life insurance policy holders name charitable organizations as beneficiaries. This results in the charity receiving all or a portion of the death benefit funds as a donation when the policyholder passes away. The funds can be restricted to specific uses or causes if desired by the deceased.

This allows people to leave a charitable legacy and make a large donation to a cause they care about deeply. It can create a meaningful lasting impact in their memory.

Wealth transfer and inheritance

High net worth individuals sometimes utilize life insurance as a means of wealth transfer and inheritance planning. They purchase policies with very large death benefits, often in irrevocable life insurance trusts, aiming to pass significant assets to heirs.

Beneficiaries in these cases receive a substantial life insurance payout that allows greater financial security and flexibility. The funds may be used to cover living expenses, purchase real estate, make investments, start businesses, give to charity, or enhance their overall lifestyle.

Tax-free income

Life insurance death benefit payouts are generally not subject to income tax. This differs from funds received from other accounts like 401(k)s or traditional investment accounts, which have income tax implications.

The tax-free nature of life insurance proceeds provides beneficiaries with the full amount intended for their use. There is no tax bill reducing funds and available options.

Covering final medical bills

Many people pass away only after extensive medical treatment for a serious illness or end of life care. This often leaves behind substantial unpaid medical bills that surviving family members become responsible for.

Life insurance can provide funds to pay for any outstanding medical bills and medical debt still owed by the deceased. This gives loved ones financial relief rather than a burdensome debt obligation.

Replacing lost income

For a spouse or family members who were financially dependent on the deceased’s income, life insurance helps replace that income stream that has been lost. Proceeds can be invested to generate ongoing interest and dividends that supplement the survivor’s own income.

The life insurance payout can also simply be budgeted to provide monthly funds for living expenses in the amount the deceased used to earn. This income replacement helps maintain financial stability.


Some beneficiaries decide to invest all or a portion of their life insurance proceeds to generate ongoing returns and growth. Investment options may include:

  • Stocks
  • Bonds
  • Mutual funds
  • ETFs
  • Real estate
  • Businesses

Conservative investments can provide supplement income through interest and dividends. More aggressive investing may aim for greater capital appreciation. Working with a financial advisor can help beneficiaries invest wisely.

Purchasing a home

Receiving a substantial life insurance payment gives beneficiaries the option of purchasing a home, potentially upgrading from renting or a starter home. Young families in particular may choose to buy their first larger home and settle in a neighborhood using life insurance proceeds.

The funds can cover the down payment, closing costs, and potentially even the full purchase amount depending on the payout size. This allows beneficiaries to buy a nice home all in cash as an optimal use of funds received.

Paying estate taxes

Individuals with especially high net worth sometimes use life insurance to cover potential estate taxes when assets transfer at death. Estate taxes only apply to extremely large estates over $12 million currently, but can be up to 40%.

Life insurance can provide liquid funds for paying substantial estate taxes so heirs do not have assets seized to fulfill the tax obligation. This is most applicable to the ultra-wealthy with over $12 million in assets.

General living expenses

Beneficiaries can use life insurance money to cover all general living expenses and improve quality of life. Expenses may include:

  • Groceries
  • Transportation like car payments
  • Utilities and cell phone bills
  • Entertainment like travel or dining out
  • Child care and children’s activities
  • Clothing and personal care

For many families living paycheck to paycheck, a life insurance payment can provide some breathing room in making ends meet and affording daily necessities.

Banking and saving

Some beneficiaries may choose to save or invest all or a portion of life insurance funds through vehicles like bank savings accounts, money market accounts, certificates of deposit, and more. This provides security, preserves principal, and generates some interest income.

Similarly, the money could be used to pay down or pay off the balances of any bank loans and debt held by survivors to improve their overall finances.

Retirement planning

A life insurance payout can allow surviving spouses and family members to boost their retirement savings. Additional funds can be contributed to accounts like:

  • IRAs
  • Roth IRAs
  • 401(k)s
  • Annuities

This gives the benefit of tax-advantaged investment growth for many years ahead, providing greater security later in life. Life insurance enables this type of future planning and preparation.

Life insurance for non-people?

While uncommon, sometimes life insurance policies are taken out on non-human entities like businesses, organizations, or charities. The death benefit can provide funds to continue operations or serve beneficiaries in the absence of an important leader.

For example, a small business owner may take out a policy on the business itself to benefit a partner who would carry on without them. Or a charity may have a policy on a devoted founder to transition smoothly after their passing.


Life insurance funds provide surviving family members with a financial safety net through a difficult time. While the money cannot replace the loved one lost, it can lessen financial burdens and provide security for the future.

Beneficiaries have flexibility to use the proceeds however makes sense for their situation – like covering funeral costs, paying debts, funding an education, making investments, starting a business, or improving daily life. This allows loved ones to focus on healing while honoring the deceased.

Frequently Asked Questions

Does the life insurance company decide what beneficiaries spend money on?

No, beneficiaries can use life insurance proceeds however they see fit. There are typically no restrictions from the insurer on what the money can be spent on after benefits are paid out.

Are life insurance proceeds considered income for beneficiaries?

No, life insurance payouts are not subject to income tax and are not considered taxable income. Beneficiaries get the full amount intended for their use.

Can you designate multiple beneficiaries for life insurance?

Yes, a policyholder can name multiple beneficiaries and assign percentages of proceeds to be allocated to each person as desired.

Does the life insurance money need to go through probate?

Life insurance benefits are distributed directly to named beneficiaries, so they avoid the probate process. This provides faster access to funds when they are needed most.

Common Uses of Life Insurance Money
Funeral and burial costs
Debt repayment
Living expenses
College tuition
Mortgage payments
Starting a business
Charitable donations
Wealth transfer
Medical bills
Replacing lost income
Purchasing a home

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