Should I Pay with a Lump Sum?

The prospect of paying monthly premiums may not be very attractive to you. You may be more interested in the possibility of paying for your life insurance in one lump sum in order to save money on premiums. Although this is perhaps not the best path to take if you are on a budget, there are certain advantages to paying for your insurance in a lump sum of money.

Investment Bonds

Paying for a life insurance policy with a lump sum is often considered an investment. These types of investment policies are usually called bonds and you can choose to invest in different kinds of bonds which can result in different kinds of financial returns. However, you can also pay smaller lump sums into your insurance policy by choosing an endowment policy which requires annual premiums rather than monthly ones.

If you choose to invest a lump sum into an insurance company, you get a bit of life cover but most of the money is invested into a fund. This fund could be one run by the insurance company or it could be a with-profits bond. A with-profits bond offers only minimal life cover and is considered to be primarily an investment of your money.

The insurer's with-profits fund invests your money into a range of assets such as shares, property and securities. Every year you get added bonuses which increase the value of your investment and at the end of your policy, you get an assured sum. You can also use your investment as income by cashing in units of your policy.

Because this type of investment offers a mixture of assets, it is seen as less risky than simply investing in stocks and shares. So if you are looking to build a balanced investment portfolio, it may be worth considering this kind of policy. There is no fixed term for a with-profits bond, so you have the freedom to cash it in early if necessary. However, you may have to pay a fee in order to do this.

In addition, when you cash in this kind of single premium investment bond, you may be liable to pay more income tax on this sum of money. This is more usual if you are a high earner and have made a gain on your investment. However, if you are paying into a regular monthly premium policy, or even one which requires a lump sum payment on an annual basis, you are unlikely to have to pay tax on the proceeds of your investment.

Ultimately, if you are considering paying a lump sum into an insurance policy, it is advisable to speak to a financial planner. They will be most aware of the different investment opportunities available from insurance companies and can guide you to make the best choice. They can also explain the finer details of such policies, and the advantages and disadvantages of each one.

In summary, paying your insurance policy with a lump sum is usually only advisable if you are looking for an investment opportunity rather than genuine life assurance. The life cover offered by these policies is minimal, so if you are most concerned about leaving your loved ones a nest egg when you die, you may be better off looking into an endowment policy rather than a single premium investment bond. However, if you wish to put your money into a moderately low-risk investment, a with-profits bond may be the right policy for you. But it will not provide you with the peace of mind that your family will be financially protected if you die, so you may wish to investigate further policies.

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