Collecting Life Insurance: Preset Installments Vs. Lump Sum

More and more life insurance companies are developing preset installment plans that life insurance policy owners can adopt. These plans differ from the standard lump sum plans by allowing the beneficiaries of a policy to receive the money over a predetermined number of years. Typical ranges for the plans are between five and thirty years.

These plans are good alternatives for policy owners that want to ensure their beneficiaries are taken care of for a definitive amount of time. They might not want to burden their spouses or children with the responsibility of managing a large lump sum amount of money from a policy claim. With the smaller payouts, the beneficiaries are guaranteed a certain amount of money that they can rely on. This system is particularly good for satisfying any concerns the policy owner has about their beneficiaries wasting the money. For example, young adult beneficiaries of a lump sum may end up spending all of their money on luxury items because of the large amount of cash and not prepare for their own futures. This would also work well if the beneficiaries are going to be at a young age upon receiving the payment. Under the preset installment method, these children would have money set aside to ensure they have enough for when they are older and may need to pay for higher education.

How Preset Installments Work?

The preset installments could work in several different ways. One method would be for the beneficiary to receive a smaller lump sum upon the death of the policy owner. This smaller sum could help pay for immediate costs associated with the death such as paying for the funeral. The other portion of the policy would be paid out over a set amount of years in equal installments. The other method of installment payouts involves simple and equal installments for the set amount of years without the smaller lump sum upon the death of the policy owner.

Preset Installments Life Insurance Benefit

Another benefit of the installment payouts can help the policy owner financially as well. By choosing for the heirs to receive plans spread out over a long period of time, the life insurance company has more time with the consumer’s money. This gives them more time to use the policy money for their own benefit. In recognition of this, insurance companies usually two different options that save the policyholder money. One way is to add the amount the life insurance policy is worth without raising the premium on the owner. The other option is to decrease the premium amount while leaving the worth of the policy the same.

Opting for Preset Installments

As an example of a policy owner opting for the preset installment plan for their $500,000 policy, they could choose to pay a monthly premium around $1,000 that would be about $300 less than if they had the lump sum payment option. On the other hand, they could choose to pay the $1300 monthly premium and the beneficiaries would receive a policy payout that totals to perhaps $525,000.

Disadvatages to Preset Installments = Advantages to Lump Sum Payments

However, there are some disadvantages to selecting a policy option that pays out in the installment method. One particular downside is the risk of high inflation. The insurance company would not adjust for this and could leave the heirs to the policy receiving less than originally anticipated. Another particular disadvantage is the risk of the heirs not being able to wait for the installments. If the policy owner’s spouse or children are at an advanced age, they will not be able to utilize the full amount of the owner’s policy.

Ultimately, installment payout methods allow consumers more options when deciding about which policy is the right fit for them.

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