Protecting Your Retirement Income – Part 2
Lump Sum Rider
In our last post we discussed some of the ways a disability can impact your retirement planning and how a graded lifetime benefits rider can help mitigate some of those problems. A lifetime benefits rider certainly has its advantages, but it is not the only solution to the retirement income problems created by a disabling condition. A lump sum rider offers an alternative solution to the same problem.
A lump sum rider offers a different approach to the retirement income issue. Unlike the lifetime benefits rider, which simply pays a set monthly amount for the remainder of your lifetime after you reach your policy expiration age (generally 65 or 67), the lump sum rider provides a one-time payment once you reach policy expiration age. With this rider, in order to be eligible for the lump sum payment, you must receive benefits equal to twelve times the monthly benefit amount during your policy term. Generally speaking, this just means you have to receive disability benefits for at least one year.
The amount of your lump sum payment is typically a percentage of the aggregate sum of disability benefits you received during your policy term, in many cases between thirty percent and forty percent of total disability benefits received. For example, assume you have a disability insurance policy that pays $10,000 per month in benefits and you become disabled at age 50. By the time you reach age 65, your policy will have paid you a total of $1,800,000 in disability benefits. With this rider, when your regular monthly disability benefits terminated, you would receive an additional one-time lump sum payment of $630,000.
This rider has its advantages and disadvantages over a graded lifetime benefits rider. Receiving a lump sum, especially one as large as the example above, can provide you with a degree of immediate financial flexibility that is not available with a set monthly amount like what you would receive with a lifetime benefits rider. For example, you can take your lump sum and turn it over to an investment manager, who will in turn be able to put your money to work for you and create passive income. Or, alternatively, a lump sum can provide you with capital necessary to pay off your mortgage, auto loans, and any existing debt, and use the remainder to supplement any retirement savings you amassed prior to your disability. A lump sum payment also provides a measure of security that lifetime benefits do not: with lifetime benefits the insurance company still controls your monthly payments, and there is no guarantee that your disability benefits will never be terminated.
The disadvantage to a lump sum rider is self-evident: it is a one-time payment. Unlike the lifetime benefits rider, which provides the security and certainty of a steady monthly income, once the lump sum is gone, it’s gone. The degree to which this is a negative characteristic of the lump sum rider largely depends on the type of person it applies to. For individuals more likely to save, invest, and exercise financial restraint, the lump sum rider may offer a greater degree of financial freedom and flexibility. For those more likely to splurge and spend the money they have, a lump sum rider may not have the structure and stability to ensure a reliable stream of income throughout their retirement years. For those individuals, a lifetime benefits rider may be a better solution.
However, if neither the lifetime benefits rider nor the lump sum benefit rider seem to suit your retirement needs, there is a third option. In our next post, we will discuss retirement protection insurance – a product that is specifically tailored to the problems that a disability can create for retirement planning.