How should Ramona invest a critical illness insurance payout of $300,000?

There are many investment avenues available to ensure any money you have from a critical illness payout keeps growing for your future goals, write Julie Cazzin and Janet Gray. Photo by Turk Stock Phtographer/Getty Images/Postmedia files

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Q. I am 44 years old and have recently received a payout from a critical illness insurance policy. I now have a lump sum, tax-free, amount of $300,000 and have to figure out how to invest it. I earn $80,000 annually and my husband Richard earns $95,000. So far, I can still work and do not have any major medical expenses.

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We have $10,000 in consumer debt, tax-free savings accounts (TFSAs) of $65,000 or so each, and registered education savings plans (RESPs) for each of our three kids to which we usually contribute $2,500 per child annually. We also have registered retirement savings plan (RRSP) contribution room of $88,000 for me and $73,000 for Richard. Should we contribute this amount all in one year? Or divide it up over several years? If we make full contributions, should we claim it all in one year or over several years?

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We have a $200,000 mortgage at 4.2 per cent for another three years. Should we put some money down on it to reduce the principal? Or would we get a better investment return by topping up our TFSAs and RRSPs? We presently invest TFSA and RESP money in blue-chip dividend-paying stocks. Is a different strategy better for RRSPs, or can we stick with this same strategy that we feel comfortable with? —Ramona

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FP Answers: This is a great question to ask because not many know about critical illness insurance (CI). For background, CI has only been available in Canada for about 30 years and about two million Canadians hold either personal or group CI policies. Contrast that to life insurance that has been offered in Canada since 1847 and currently more than 22 million Canadians have personal or group coverage.

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CI was started in 1983 by a South African doctor to help those who are diagnosed with a critical illness (most commonly heart attack, stroke or cancer) and as a result suffer financial hardship. The critical illness policy holder can choose to use the funds in any way they wish: medical expenses; loss of income; home renovations or travel for medical assistance. A lump sum, tax-free benefit is paid 30 days after a diagnosis of a listed and defined illness.

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Ramona, because you have $10,000 of consumer debt, I suggest that would be the first place to use the CI benefit. Consumer debt has a high interest rate, often at 20 per cent or more. Continue to pay off the minimum balances to avoid the high interest rate. Consider any events or goals that you have coming up so that you can set funds aside for those expenses.

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RESPs offer a 20 per cent Canada Education Savings Grant (CESG) on the first $2,500 contribution per child per year up to the end of the year the child turns age 15. Check with your RESP holder (usually a financial institution such as a bank) to see if you have CESG room to top up because a 20 per cent CESG is worth it. Keep in mind that the closer your kids each get to postsecondary school age — and their need to access the RESP funds — the more advisers recommend reducing the equity holdings. So by the first year of the child’s postsecondary education, when university or college expenses are starting, you have a large portion, or even all, of your RESP holdings in less volatile fixed-income funds and cash. As well, depending on the age of your kids and the education assistance you plan to give to them, consider saving a portion of the CI benefit to invest and grow for their future use outside of the RESP. The money could even be used for some of their adult expenses, such as help with rent or buying a condo or a vehicle for work.