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

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.

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?

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

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.

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.

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.

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.

RRSP contributions are best made in years when you and Richard have high incomes for the optimum tax deduction. But you should have a plan to withdraw from the RRSP in future years when income is lower, such as in retirement or years without employment. The aim is to lower the amount you owe in federal and provincial income tax. Since you are likely a few years from retirement, it is still a good long-term plan to hold your RRSP investments in primarily equity products.

For the two of you this year, it does make sense to contribute to your RRSP if your incomes are high: more than about $60,000 each. This is probably a calculation to make each year, whether to contribute or not. It’s not always a good idea to contribute to an RRSP all in one year unless you plan to claim the deduction over several years according to where you fall within the income tax brackets. An accountant can help you calculate that amount within the first 60 days of each year so you get maximum tax relief from your contribution, which you can then make in those first 60 days.

Ramona, I also suggest maximizing your TFSAs now to create an ongoing tax-free source of money regardless of whether you need it in the short- or long- term. With a fully maximized TFSA going forward, it might be easier to keep up with the annual updates on the TFSA annual contribution room limits. In 2025, the contribution room was $7,000 each.

Your mortgage rate is reasonably low for the next three years. Rather than applying a large lump sum to the principal, think about using the prepayment options that most lenders offer, such as an additional 15 per cent on each payment or a 15 per cent lump sum payment on the mortgage anniversary. This is a good idea for two reasons. First, it still allows you to have some funds available for other life events or crises. And second, the prepayments to the mortgage are applied directly to the principal, which reduces the amount of interest owing. You can easily stop the prepayments if funds are needed elsewhere.

• Retiring surgical nurse Richard wants to know whether to max out RRSPs or top up TFSAs
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With the remaining money, you might be able to find a non-registered investment that can offer you a balanced fund that could earn you more than 4.2 per cent, after fees. This is a conservative way to ensure any money you have left from the critical illness insurance payout after you have made some of the investments above keeps growing for future goals.

Janet Gray is an advice-only certified financial planner with Money Coaches Canada in Ottawa.

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