Is Income or Lump Sum Life Insurance Best?

Most people with life insurance choose a policy that pays out a lump sum in the event of their death or terminal illness where included. However, there is another payment option available whichs pays out periodic or monthly payments rather than receiving all the money at once.

Unlike some other insurance considerations (such as how much insurance you can afford), deciding between a lump sum and a series of regular payments often means thinking about what's best for your beneficiaries, rather than yourself. It may not be much fun talking about what will happen if you die, but if the objective of insurance is providing for your loved ones if it does happen, then it makes sense to get these details sorted out.

It's important to note, first of all, that an income policy could potentially pay out more or less than a lump sum policy depending upon when a claim is made. With a level lump sum policy the cover will always be the same whether you claim at day one or the day before it terminates. However, an income policy will only pay out for the remaining term which restricts the number of payments your beneficiaries can receive. So if you choose a monthly benefit of £1,000 and claim a month before the policy ends, your beneficiaries will only ever receive £1,000. It's for this reason that an income paying policy is the cheapest form of life cover, like for like.

If your beneficiary is an adult (for example your spouse) then there's usually no problem with providing the insurance payment as a lump sum. It may even be a good idea to talk to your beneficiaries and find out what they would prefer. The payment option you choose will be very much dependent on your family circumstances, and on which option will most benefit them. If, for example, the insurance is intended to pay off the mortgage, then a lump sum is typically the best option. On the other hand, your family may benefit more from a regular income rather than a large sum of cash if the mortgage has already been fully paid or is taken care of with additional mortgage life insurance.

In some situations, your beneficiaries may be young children, teenagers, or other people who you might feel uncomfortable leaving a lump sum to. In such cases, you may want to ensure that your dependants have a regular income, or you may simply want to restrict their access to a large lump sum as they may be too young to manage it effectively.

Most of the time, this is a pretty simple choice to make as it usually comes down to the specific needs of your beneficiaries. In most cases, a lump sum works well, and is the simplest choice for providing the most financial flexibility for the beneficiary. As a general rule, if your beneficiary is a minor or other financially inexperienced dependant, an income can be a better option. An adult beneficiary may prefer the flexibility of a lump sum which can be used or invested as they desire, while for a family, either option might be appropriate depending on the specific circumstances.

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