Commuted Value of Life Income with Period Ascertained

[AfterdarkMilan]

I am a little bit confused as to what should be the commuted value under a settlement option of life income with period ascertained. Can anybody clarify it for me?

During the months ascertained, the commuted value is just the present values of the future payments ascertained + the PV of the life income at the time of the election. Upon death, an equal amount of commuted value is also payable. Is this correct?

After the ascretained months, the commuted value is payable when elected equal to the PV of all the future life annuity payments. Upon death, is the NSP or PV of all the future life annuity payments also payable? I am assuming this is not the case, but the present tables of the contracts of my current company shows that the beneficiary will not recoup the maturity value supposed to be paid in lump sum if death occurs 1-3 years after the ascertained periods and the NSP is not paid as commuted value. There something awry in the way the factors were computed.

I hope somebody could clarify this for me. I could not find any literature that is crystal clear on this matter.

[Gandalf]

Normally, there are no cash values associated with annuity payments which are life contingent.

So if a contract for example provides a monthly income starting at age 65 with the first 120 payments certain, the cash values are only related to the first 120 payments. If the person dies after collecting 24 payments, the value will be the present value of the remaining 96. (The contract might not even offer a commuted value then; it might only commit the company to making those 96 payments as they fall due.)

If the person dies at 75.5, after collecting 126 payments, there are no remaining guaranteed payments and no cash value would be paid.

Similarly, usually the same value would be payable in cash at those times even if the person were alive. E.g., if the annuitant were alive at 67, after receiving 24 payments, the most he could collect in cash would be the present value of the remaining 96 guaranteed ones. (Not all contracts would allow that; some would only make the payments as due.) If he did take the PV of the remaining guaranteed payments, he would still be entitled to the non-guaranteed ones later if alive (starting at age 75).

If alive at 75.5, he could not elect to take the PV of the remaining future life-contingent payments. (Why? Because then everyone would keep their contracts while healthy, then surrender them shortly before death.)

Is it fair to the buyers that some receive less in benefits than they paid? Sure. Some, those who live longer than average, receive much more than they paid, even much more than they paid accumulated with interest. How could the company afford to pay the long-lived ones if those who die early got their money back?

(There are contracts, called refund annuities, where upon death the contract pays the premium minus the annuity benefits already paid, without interest. Those contracts, for a given premium, pay smaller monthly benefits. So when people take that option, they all pay for that extra guarantee, in the form of a lower income. The long-lived ones can still get more than they paid, with interest; the company pays for that from the interest earnings on the premiums of those who die early.)

[AfterdarkMilan]

Thank you so much Gandalf. This clarifies everything.