What Is a Lump Sum Payment?

what is a lump sum payment

A lump sum payment is a financial vehicle in which a recipient receives one large sum of money upfront instead of a usually larger amount annuitized over multiple payments. Mention of it usually follows concepts like loan payments, legal settlements, and lottery winnings. 

There are a number of reasons why you may or may not wish to consider taking the lump sum. In the following article, we'll be exploring those reasons in a little further depth. Let's begin with the four reasons you might wish to consider a lump sum payment option. 

1. You Have Very Little Debt 

Many people consider taking the lump-sum payout when they don't have a lot of debt to reconcile. That's because they can afford to take any reduction from a lump-sum tax or other penalties as there isn't anything else waiting on the other side to suck those funds dry. 

If you're considering this, take a look at all of your debts, especially those non-secure, high-interest debts that are holding you back. Knocking those out at once might free up enough of your income to more rapidly build wealth. 

2. Your Beneficiaries or Lack Thereof 

Particularly with inheritance payments or legal settlements, some may choose the lump-sum path because they don't have a lot of alternative uses for the money. They also have very few, if any, people they want to take care of when they're gone. 

Having a shortage of beneficiaries or charitable causes to support could be a good reason to accept any reduction. Just make sure it's what you really want to do. 

3. Your Life Circumstances 

Life circumstances can pertain to any number of things. Maybe you have a debilitating illness or disease and won't have much further use for the money. Perhaps you don't right now, but you've done the math and don't feel like you'll need it beyond another 10-20 years. 

Other life circumstances, such as planning to quit your job or paying off your house and any other debts so that your existing income is freed-up, also are worth considering. Make every decision fully aware that you never know what the future holds. 

4. Tax Preferences 

There may be some tax benefits to taking a lump-sum payout. Then again, there may not. It all depends on the reason for the lump-sum payout and any taxes or penalties that may be affixed to it. 

You'll certainly want to meet with an attorney and an accountant before deciding. When doing so, remember to account for their fees and expenses. 

When Not to Take a Lump Sum 

Billionaire investor and owner of the Dallas Mavericks NBA team Mark Cuban had some surprising advice for lottery winners. While most dream about making the "big score" and getting all their money at once, Cuban said to slow down and consider the annuity instead. 

Annuities ensure that you handle the money responsibly. It keeps the fair-weather friends from your door. It greatly reduces your tax burden. 

You should consider taking the annuity when the money is guaranteed, transferrable to loved ones, and enough to live on and provide a satisfactory level of comfort. 

That said, you can get a lot more out of a lump sum than you're probably thinking provided you're working with the right firms. Read this review, in particular, to understand how to maximize a lump sum out of a structured settlement. 

Your Lump Sum Payment Can Open Doors 

A lump sum payment can change your life depending on the size of the settlement and circumstances. Make sure you do your research and choose wisely. For more financial tips and information, check out some of our additional posts.

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