Posted in Finance, Accounting and Economics Terms, Total Reads: 896
Definition: Lump Sum Payment
Lump Sum Payment is a single payment of a lot money rather than series of future smaller payments made over time. Lump sum payment is usually a term in repayment of loans where if the loan taker has a lot of money to repay, he/she can make a big amount of payment thereby reducing their own burden.
Lump sum payment will typically be lower compared to a series of payments because the other party paying lump sum amount is being asked to provide more money at once.
Lump sum payments are often discussed in relation to products which provide payouts over a series of times, such as retirement schemes, pension funds and annuities. Sometimes, corporate use lump sum payment as an incentive for early retirement. Insurance companies also pay lump sum payment to the beneficiaries’ claim for insurance against loss/damages.
Advantages of Lump Sum
A lump sum payout allows the receiver to grow her income substantially if invested wisely. Individuals receiving lump sum payment are not impacted by the health of paying company. If the company goes bankrupt, the individual has got all of his money.
Disadvantages of Lump Sum
Receiving a lump sum payment affects the interest rate calculation, and the money received at once can be spent unwisely. A gradual inflow of money acts a cushion for the beneficiary.