A lump sum payment is a method where a debtor pays the recipient in single payment mode. As opposed to annuities where payments are spread out for a given span of time, lump sum payments cover the benefits of the recipient with a single transaction. Lump sum payments are common during loan repayments, retrenchment benefits and in lottery wins.
When are lump sum payments done?
Lump sum payments are applicable, when the intended recipient needs to receive the entire amount of money. In the use of lump sum payments, there is the provision for the recipient to receive the payment in small annuities, but parties decide upon the lump sum method. Below are instances when lump sum payments are made:
- Retirement or social benefits Lump sum payments are used when retirees claim to have their social funds in a single payment. Instead of the retirement benefits and pension being spread over after retirement, individuals may ask relevant authorities to pay in lump sum.
- Retrenchment compensation Another case where lump sums are paid is, when workers are retrenched. If a worker is given a notice to leave their work due to redundancy or similar situation, the said employer is supposed to pay the worker retrenchment benefits. Usually, retrenchment benefits are paid by using lump sums. Loan settlement In loan settlement, the repayment period may be spread over several years depending on the income margin. However, if the borrowers have received some bonuses or unexpected income, they can decide to settle the loan with a lump sum payment. For the loan, this reduces the interest amount bound to accumulate over the repayment period. Insurance benefits For insured people, if an accident occurred and the insurance company accepts to pay for the replacement of damages, lump sum payment is the method used. Legal settlements between two conflicting insurance companies may be settled by one party by paying a lump sum to the injured party. Sweepstakes and lotteries In the case that one wins a lottery, there are two options on which the winner can receive the funds. One is receiving the funds in equal instalments over a given period of time or the option to take the fortune in a single payment.
Lump sum payments have advantages and disadvantages on both the receiving and giving end. It is up to the persons involved to come into an agreement which mode of payment will be the best. If a lump sum payment will have significant advantage over annuities, then it should be the best option.