How to Invest $100,000 (Pt. 1)

April 20--Come into a large sum of money? Investing it can seem intimidating. There are countless choices and lots of jargons. Fear not. This article helps you learn about a number of options and tools. So grab your money and invest with confidence.

Let's say a cool $100,000 hits your checking account, whether it's the lottery win or an inheritance. Before you go bananas and buy a Tesla with automatic lane-changing capabilities, please take a deep breath. The last thing I want to see you do is blow all your money on sports cars or bad investments.

Whether you receive $100,000 or $1,000,000, there are a few steps you should follow first, such as paying off debt and building an emergency fund. Then, if you have extra money to invest, here's a list of dependable ways to grow your six figures.

1. Money market accounts or high-yield savings accounts. If you have $100,000 and aren't sure where to put your money yet, these accounts are great for short-term investing.

Don't let the term "high-yield" fool you. They don't provide great returns -- a fraction of 1% -- but at least they're better than burying a suitcase of cash in the backyard.

Money market accounts often require a larger deposit in return for a higher interest rate. Many times, you can get more out of a money market account than a certificate of deposit (CD), but I promise you that money isn't going to pour out of your faucet -- even if you invest your whole $100,000.

2. Annuities. If you want guaranteed returns, fixed annuities are a beautiful thing. You can have confidence that your money will be safe. This contractual guarantee insurance companies offer can reduce the stress that comes with investing in the stock market. But like money market accounts, they're pretty boring when it comes to the returns.

I had a client who really didn't want anything to do with the stock market volatility, and because CDs yield pretty much nothing, I found him a five-year fixed annuity paying 3%. That's barely making inflation, but at least there were no worries.

Another form of annuities that offer guarantees is fixed index annuities (FIAs and also referred to as equity indexed annuities). The return rate is based on a designated equity-based index. They are similar to fixed annuities in offering principal protection, but instead of giving a fixed interest rate, FIAs use a combination of various market indexes and interest caps to calculate your overall return.

What I do like about annuities is the pension-like benefit that can pay an income stream for the rest of you and your spouse's life. They are also helpful when you can't get life insurance or you want some long-term care benefits but don't have the money to pay for it out of pocket.

Remember that annuities have pros and cons. Think through your options before signing up.

3. Cash-value life insurance. You can get dividends from your life insurance policy. This type of investment might make sense if you have extra money sitting in a bank CD.

In most instances, I'm not a big fan of cash-value life insurance as a pure investment play. It definitely serves some estate-planning purposes but that only applies to very few people.

If you talk to an insurance agent about investing, there's a 99.9% chance the agent suggests you buy some sort of cash-value life insurance -- so-called because it generates a cash return from investing your premiums, which fattens your policy's value. (The other main type of insurance, called term, has no such investment feature.) A cash-value policy could be a whole life, universal life or an indexed universal life policy.

Say you put in $100,000 and your principal is protected. The insurance company may pay a 3% dividend, which is pretty attractive compared with the interest rates currently available at your local bank or even in CDs online.

While this looks like a good deal, the cost of insurance eats away at it from the beginning. It's like paying off a mortgage. You pay a lot toward interest at first and very little toward the principal. The same is true of whole life or some universal policies.

You must subtract the cost of insurance from the 3% dividend, which ends up being about 1.8%. This might not sound very attractive, but it's probably better than what you could get from a CD.

For those who are no longer in accumulation mode, but are planning for how to maximize their estate for their children and organizations they support, a life insurance policy is a great investment.

For example, a 69-year-old widow sets aside $100,000, which she plans to give to her church when she dies. If she lives to 86, as the Social Security actuarial tables estimate, she has 17 years to grow the money.

Invested in a CD paying 2%, her $100,000 investment will increase to approximately $140,000. But what if she purchases a single-premium life insurance policy and names the church as beneficiary?

As a non-smoker in good health, she can purchase a $300,000 policy, paid up for life, for a single premium of $99,879. By purchasing life insurance instead, she creates an additional $160,000 gift for her church. It's an absolute slam dunk.

(The second part of the article looks at investing your $100,000 in the stock market and other investment vehicles that potentially generate higher returns.)

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Jeff Rose, CFP, is the founder of Alliance Wealth Management in Carbondale, Ill., and also is the founder of the website Good Financial Cents and Life Insurance by Jeff.

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