Weighing Life Insurance Payout Options: Lump Sum vs. Income Replacement

Did you know when purchasing life insurance, you have options for how your policy pays out the death benefit? The purpose of life insurance is to help in the event of a personal tragedy, and there are options to choose from to protect your family in the way that works for you. Now, more than ever, more people have said they are likely to purchase life insurance. According to the 2024 Insurance Barometer Study, 42% of American adults say they need life insurance, or more of it. But many who need coverage, or more coverage, aren’t sure which product they need or how much coverage to buy.

That may be because there are many options when it comes to life insurance, from the type of insurance to the coverage amount to life insurance payout options. The multiple policy designs, add-ons and specific terminology can be a bit overwhelming. The key to getting started is to:

• Know your goals
• Consider your long-term needs
• Compare premiums to your monthly budget

Various coverage and benefit options allow you to find a policy that will best protect you and your family.

When it comes to death benefit payouts, it's common to think the only option is a lump-sum payout. However, that may not fit your needs. You could choose to receive a life insurance payout as income replacement.  Here’s how they’re different, how they’re the same and what to consider as you choose what works best for you.

Lump Sum

A lump sum life insurance death benefit is a one-time payment to the policy’s beneficiaries. When the policy is purchased, the owner decides how much insurance coverage they want to buy. This is typically enough to pay off significant debts (such as a mortgage), support the beneficiaries for a period of time while as they grieve and help contribute to long-term goals.

Pros:

• Depending on the amount, a lump sum can be used to immediately pay off interest bearing debts. That might include a mortgage, a car loan, college tuition and more.
• The funds received in a lump sum life insurance payout can be invested.
• This kind of life insurance payment offers flexibility.

Cons:

• A large lump sum amount can feel overwhelming, especially when recipients are in the midst of grieving.
• The money from a lump sum life insurance payout may not last as long as anticipated.
• Death benefits can easily be spent without a long-term strategy in mind.

Income Replacement

While a lump sum life insurance payout design is the most common type of death benefit payout, it’s not the only option, and it’s not always the best fit for everyone’s goals and needs. Many people want to ensure their loved ones will be able to continue living their current lifestyle — including factors like mortgage and tuition payments, as well as bills and expenses — without disruptions to their finances.

Pros:

• With an income replacement payout design, steady monthly tax-free payments are paid to beneficiaries for a set number of years.
• This type of death payout benefit is guaranteed to last for a predetermined length of time. 
• An income replacement payout can help avoid disruptions to finances and allows loved ones to maintain their current lifestyle and cover regular expenses like bills, childcare costs and more.
• The controlled payouts may help prevent spending that doesn’t have a long-term strategy in mind.

Cons:

• A series of small payments rather than one large one doesn’t offer as much flexibility to pay off large debts.
• This type of payout limits the ability to earn interest from a large lump sum.

Ultimately, the payout structure you choose for your life insurance policy is based on a number of factors that must be carefully considered. But don’t forget that you have options.

Financial Stability for Them, Peace of Mind for You

No matter which payment design you choose, a life insurance policy helps ensure financial stability and support to the most important people in your world. Finding the right policy can feel like a big decision. Your local Farm Bureau agent will help you identify your goals and find a solution that best fits your needs. Contact an agent today to protect your family’s financial future and ask about Income Guard Term Life.