Tag Archives: Life insurance

An income stream for life

An income from superannuation lump sum

The following simple story aims to explain the difference between a superannuation lump sum payout  or a lump sum payout from life insurance policy and a regular income.

Suppose you went to a building contractor and said, “I want you to build me a house.” “What kind of a house?” “Well,” you say, “a Colonial, brick house, with ten rooms, three baths, and a sun porch, slate roof, hardwood trim and floors, open plumbing, and hot-water heat.”

Sometime later he calls you on the telephone and says, “I’ll drive you out to look at your new house.” You motor out to a beautiful section of the city and stop in the midst of a group of handsome homes.

The contractor says: “Here’s your house, just what you ordered.” But you are puzzled. There isn’t any house opposite the place where you have parked the car. “Where is my house?” you ask. “Right here,” he answers, pointing at the block before which you have stopped. “But there isn’t any house there,” you exclaim, in amazement. “There is nothing on that lot but a heap of bricks, barrels of lime, lumber, kegs of nails, building hardware, slate shingles, plumbing supplies, and cans of paint.”

“Well, I call that a house,” says the builder. “A house!” you exclaim. “Why, that is only the material out of which a house may be built.” A superannuation lump sum is only the brick and mortar of the House of Protection.  And yet every day, all up and down this country, superannuation and related life-insurance policies, intended to furnish permanent support are settled in lump sum and people are saying to themselves with satisfaction, ”I have provided my family protection in event of my premature death.”

Adapted from: Lovelace, Griffin M., 1876-. The house of protection, 1921. New York and London, Harper & brothers.

Conversion of superannuation lump sum

The conversion of accumulated superannuation into an income stream is not mandatory.  However the benefits of converting superannuation or a life insurance settlement into an income stream are enormous.

Most people believe that their superannuation or life insurance will provide for them into retirement or their dependents in the event of their premature death. The accumulated balance in superannuation represents a portion of a person’s average lifetime earnings and most people don’t plan how much this will amount to.  Alternatively, how life insurance will support their dependents.  Superannuation contributions are made at a mandated level and some people may have a basic level of life insurance.  In order for these two things to provide for retirement or dependents, it’s important that they are invested to provide an income stream.

In these circumstances, dependents need to be protected. But how are they protected and indeed what is ”protection”? According to the dictionary, protection is that ‘which preserves or keeps from injury or harm’. What is the danger or harm from which superannuation and life insurance is intended to shield dependents?  It is the lack of food, shelter, clothing, medical care, education, and reasonable comforts, either for life or for a specified period.

Does superannuation and life insurance, as it is arranged in the average case, really protect the beneficiaries against the lack of the necessaries and reasonable comforts of life? Unfortunately, there is no doubt as to the answer to this question.  It is emphatically ”no.” The average person is not actually guaranteeing protection to the family, as thought.

Further Reading

Income from Superannuation lump sum