What is the difference between lump sum and income?
A lump sum is a single payment generally paid once off. This is generally a large sum and the size generally comes with a few challenges.
On the plus side, a lump sum allows for big lifestyle adjustments and to settle large amounts of debts.
On the downside managing large sums of money is novel to most of us and poses very big risks to many. It has a tendency to change the way we think about money. We tend to overspend, we are guilty of thinking we have more than we actually do and we do things that even surprise ourselves. This is due to the cognitive and behavioural financial biases we have.
Income on the hand like an annuity income or disability income will pay a smaller amount on a regular basis. This protects us from the miss management of money and over time can pay far more than we think. The downside to getting payments monthly is that settling debt and lifestyle adjustments are not an option.
Our previous blog Factors that affect premiums may also be of interest.
Disability Income Protection
Insurance that pays a monthly income in the event of illness or injury. It ensures that you’ll continue to have an income, even if you’re no longer able to work.
The benefit allows you to cover your ongoing monthly expenses such as food, electricity, education and other essentials.
This can cover both temporary and permanent conditions. In terms of financial planning, this is one of the essentials to a long term plan. If you are dependent on your income and unable to work you can see the issues this creates for you and your family.
Lump Sum Disability Cover
Is a benefit that pays a once-off lump sum in the event of permanent disability.
This benefit is ideally suited to settling debts and also the costly expense of alterations to your vehicle or home.
You can use a lump sum benefit to cover your income but there are several drawbacks.
Life Cover
Life Cover pays in the event of your death. This ensures that your dependents and any other financial responsibilities are taken care of.
There is an option for life cover to be paid as a lump sum or an income but the more common life cover is the lump sum .
Some providers tread Life Cover as the umbrella product. You can have multiple products integrated into your life cover (Disability, critical illness, income continuation benefit). This means that you will get a disability pay-out in the event of illness or injury to settle your bond and this would reduce the amount of life cover you need,
This quote is funny but true, "I detest life-insurance and financial planners, they always argue that I shall someday die, which is not so" Stephen Leacock
How much cover do I need?
Income Protection
You would look to cover all your monthly expenses. The maximum you can insure for is your monthly after-tax income. The benefit pays out tax-free and begins paying after the waiting period. You can select a payment period up to age 70 some providers even offer to pay monthly for as long as you live.
Example: if your monthly expenses total R30 000 you can insure for R30 000 monthly income with a 1 month waiting period. If you are unable to work due to injury for 10 months your insurer will pay out the R30 000 per month after your 1 month waiting period. It is worth mentioning that the longer the waiting period you select the lower the premium will be.
Lump-Sum Disability
The goal here is usually to cover your debts and to have a lump sum for lifestyle adjustments. Not everyone qualifies for income protection and you might need to use lump-sum cover to provide an income. The amount of cover is therefore very dependent on your needs.
Life cover
Although it only pays out in the event of your death you can choose a lump sum product or a monthly income product. Depending on your needs you may what a lump sum payment to settle your debts and education and then you could opt for an income to cover your spouse’s monthly expenses.
When considering which benefit to choose it is important to speak to a financial planner as there are numerous factors to consider. Overlooking anything in this part of your financial plan can have dire effects on you and your family.
Below is two scenarios that can hopefully help you compare lump sum and income. In the first scenario, we look at investing an amount for an income.
The second scenario is showing the lump sum required to produce the income.
What is it worth
These are some of the calculations we would do with you to determine your future needs in the event of disability and death.
In summary there are benefits that pay once off amounts and then benefits that pay monthly. They both have different strengths and the choice is actually about what if better for you and your family.
Live Trust Grow Matter
The information provided is not intended to address the specific circumstances of an individual and is for information purposes. Should you require financial advice please contact us info@growmatter.co.za
