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A Different Perspective on Inherited “Wealth”

In a recent column I listed some common sources of sudden wealth, including inheritance and life insurance. Several of my clients have inherited substantial sums or received large life insurance payments upon the death of a spouse. A common reaction among these heirs is guilt. There’s a sense that it’s not right to profit by the death of a loved one or enjoy living securely as a result. As one of my newly-widowed clients put it, “It feels as if taking the money is saying it was okay that he died.”

Well-meaning friends and advisors may remind widows or widowers that the life insurance is there to provide for them and their spouses would want them to be taken care of. That may be perfectly true, but it doesn’t do much to relieve the feelings of grief and guilt.

Such painful emotions may lead people to spend inheritances recklessly. The unconscious motivation is a need to get rid of the money in order to get rid of the difficult feeling. This is one reason advisors like Susan Bradley tell inheritors that the first thing they should do is “nothing.”

There is also another strategy that can help put inheritances and life insurance receipts into perspective. This is, first, to emphasize that the purpose of life insurance is to replace income. An insurance payment may seem like a huge sum. Yet it is likely to be relatively small compared to what the deceased spouse may have earned over even a five-year period or the amount of income it will generate. The same can be true of an inheritance.

As an example, suppose Marian was widowed at age 50 when her husband, also age 50, died suddenly of a heart attack. Her inheritance consisted of a business valued at $500,000 (which she sold), a life insurance policy in the amount of $250,000, an unmortgaged house worth $150,000, and savings of $100,000. Suddenly Marian had a net worth of a million dollars. It was enough to secure her future as well as provide income to supplement her $30,000 annual salary.

From her perspective, she was “rich” because her husband had died. Appreciating or even using the money felt wrong to her.

It was helpful for Marian to consider some numbers. At the time of her husband’s death, he was receiving a salary of $150,000 a year—a total of $750,000 over five years or $1,500,000 over ten years. His thriving business was increasing in value by about 15% per year. It would have been worth close to a million dollars in another five years, and over two million after ten years. The couple lived modestly, and they had planned to invest at least $50,000 a year toward retirement. This amount, added to their existing $100,000 in savings, would have totaled perhaps $400,000 after five years and perhaps $785,000 after ten years. After ten years, Marian and her husband could reasonably have expected to have a net worth of at least three million dollars.

Instead, her inheritance of one million dollars represented everything she would ever receive monetarily from her husband. Invested, it gave her an income of approximately $159,000 over five years and $344,000 over ten years—about one-fifth of what her husband’s earnings would have been. In addition, taking out the income meant she maintained her net worth but didn’t substantially increase it.

In reality, the death of Marian’s husband left her poorer, not richer. The inheritance seemed like such wealth only because she received it in a lump sum instead of over a period of years. Seeing this comparison helped Marian change her perspective so she could accept and use her inheritance with more peace of mind.

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