A lump sum, in general, is a single payment which satisfies all of the benefits owed to the recipient. These payments are often seen in cases of corporate retirement packages, lottery winnings and court-ordered financial settlements. Insurance companies commonly offer such payments to beneficiaries of life insurance policies. In some financial situations, such as lottery winnings or retirement benefits, the recipient may have a choice between a smaller lump sum payment and a fixed payment issued over time, also called an annuity.
Investment experts are divided on the issue of lump sum distribution over annuities. A larger one-time payout of a company retirement plan can offer the retiree enough money to make lucrative investments which will support him or her comfortably through retirement. The problem with this type of payment, however, is once it's gone it stays gone. Retirees with large personal debts may have to use much of the lump sum payment to become financially solvent. A fixed annuity payment may be preferable to a lump sum, but it may not be enough to invest.
Many lottery winners are also offered the option of a smaller lump sum payment in lieu of an annual check. The decision between accepting a million dollar payment spread out over 20 years and a single check for $200,000 may appear to be a simple one, but tax liabilities do matter. Annual income from lottery winnings will continue to be considered taxable, while a one-time payment allows for all of the taxes to be deducted at one time. Some winners prefer the option of a lump sum payment in order to pay off creditors in a more timely fashion.
Insurance benefits may also be distributed in this manner. Survivors facing the challenge of liquidating an estate often need substantial amounts of cash on hand. Homeowners who require immediate and substantial repairs usually benefit from a single large payment to hire proper contractors and purchase quality materials. Legal settlements between insurance companies may also involve a lump sum payment to the injured party in order to pay off medical bills and damage claims.
