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STRUCTURE AND FUNCTIONAL CHARACTERISTICS
OF SETTLEMENT OPTIONS

Life insurance settlement options, as a group, embody these three basic concepts:

A number of options have evolved from this conceptual foundation, but they can be reduced to these four fundamental options:

These four options will be discussed under the conceptual classifications mentioned above.

Retention of Proceeds at Interest

Structure of the Option

The simplest and most flexible of all settlement options is the interest option. The fundamental concept underlying this option is that the proceeds will be maintained intact until the expiration of a specified period or until the occurrence of some specific event. It is an interim option; it postpones the ultimate disposition of the proceeds and must be followed by a liquidating option or a lump-sum distribution.

The company guarantees a minimum rate of interest on the proceeds, which is payable at periodic intervals, usually monthly. If the policy was participating, the proceeds will be credited with the actual rate of interest earned by the company or, more likely, a rate approximately equal to the interest factor in the dividend formula. Excess interest is usually paid once a year on one of the normal interest payment dates.

The interest on proceeds left with the company may constitute a significant portion of the primary beneficiary’s income. Indeed, it is sometimes adequate for all the beneficiary’s income needs. Frequently a life income is provided to the primary beneficiary (usually, the insured’s spouse) through the interest option, with the proceeds at the primary beneficiary’s death applied to the needs of the contingent beneficiaries (often the insured’s children). To determine how much principal must be left with the company to provide an interest income of a desired amount, see tables 25-1 and 25-2.

Tables 25-1 and 25-2 are based on the assumption that the proceeds will yield even percentages between 3 percent and 8 percent annual interest. Thus the annual income per $1,000 is assumed to be $30, $40, $50, $60, $70, or $80. However, if payments are to be made monthly rather than annually, the amount of each payment will be somewhat less than a proportionate share of the annual interest, owing to an adjustment made for loss of interest. If, instead of paying interest at the end of the year, the company pays at the end of the first and each subsequent month, it loses 11 months’ interest on the first payment, 10 months’ interest on the second, 9 on the third, and so on. Altogether it loses 11/24 of one year’s interest. At 3 percent, the interest on $30 is $0.90, 11/24 of which is $0.41. Thus the effective amount of interest earned is $29.59, which divided by 12, yields $2.50 as the proper monthly payment, rather than $2.47 (30 ÷ 12). Such adjustments are preprogrammed into financial calculators’ solutions.

Functional Characteristics

The primary beneficiary can be given varying degrees of control over proceeds held by the company under the interest option. If the policyowner wants the proceeds to go intact to the contingent beneficiaries eventually, he or she will give the primary beneficiary no rights in the proceeds other than the right to receive the interest for a lifetime or for some other specified period. If the policyowner wants to provide flexibility to meet unforeseen needs, he or she may grant the primary beneficiary a limited right of withdrawal. This creates no complications for the insurance company and is always permitted.

Further flexibility and control may be provided by giving the primary beneficiary the right to elect a liquidating option within a specified period or at any time. Most insurance companies permit this flexibility, but as explained earlier, unless the liquidating option is elected within a stipulated period after the insured’s death, the benefits will be provided on the basis of current rather than contract rates. The settlement agreement itself may stipulate that after a specified period of time, or upon the occurrence of a stipulated contingency, the proceeds will be applied under a liquidating option for the benefit of either the primary beneficiary or the contingent beneficiaries, or both. In that event, contract rates will apply.

The beneficiary may be given complete control over the proceeds by receiving an unlimited right of withdrawal during his or her lifetime, as well as the right to dispose of the proceeds after his or her own death. One or the other of these rights must be present if the proceeds are to qualify for the marital deduction, which can be very important if the insured has a large enough estate to create a federal estate tax liability. As mentioned, the only forms of disposition by the beneficiary that many insurance companies will permit are payment to the beneficiary’s estate or payment to irrevocably designated contingent beneficiaries. If the primary beneficiary is given an unlimited right of withdrawal, the guaranteed rate of interest may be lower than would otherwise be the case. If the beneficiary is entitled to a lump-sum settlement but chooses to leave the proceeds with the insurer under the interest option, she or he can retain any privileges the insurance company is willing to grant.

Most companies are willing to retain proceeds under the interest option throughout the remaining lifetime of the primary beneficiary or for 30 years, whichever is longer. Thus the interest option may be available to contingent beneficiaries. A few companies will hold the proceeds throughout the lifetime of the primary beneficiary and the first contingent beneficiary. From the company’s standpoint, some limit is necessary to control the cost of administration and to avoid an indefinite projection of contract rates. (If the insured or the beneficiary elects a liquidating option for the contingent beneficiaries to commence upon termination of the interest option, contract rates will be applicable.)

As a general rule, a company will not accumulate the interest credited to proceeds retained under the interest option. In other words, it insists upon paying out the interest at least annually. This is to avoid any conflict with the laws in several states that forbid the accumulation of trust income except that payable to a minor beneficiary. By analogy, these laws can be applied to proceeds held by a life insurance company. Most—but not all—companies will therefore permit the accumulation of interest income payable to a minor beneficiary; otherwise, a guardian might have to be appointed to receive the interest distributions.

Insurance companies’ unwillingness to accumulate interest has a profound impact on the technique of programming, as will be apparent later.

TABLE 25-1
Amount of Principal Needed to Provide a Specified Annual Interest Income at Various Rates of Interest

Annual

Income Desired

 

Annual Interest Rate

 

3%

4%

5%

6%

7%

8%

$     100

250

500

750

1,000

2,000

10,000

20,000

100,000

$ 3,350*

8,350

16,700

25,000

33,350

66,700

333,350

666,700

3,333,350

$ 2,500

6,250

12,500

18,750

25,000

50,000

250,000

500,000

2,500,000

$      2,000

5,000

10,000

15,000

20,000

40,000

200,000

400,000

2,000,000

$     1,700

4,200

8,350

12,500

16,700

33,350

166,700

333,350

1,666,700

$      1,450

3,600

7,150

10,750

14,300

28,600

142,900

285,750

1,428,600

$      1,250

3,150

6,250

9,400

12,500

25,000

125,000

250,000

1,250,000

The values above are interest-only payments; payments would continue without change and without liquidating

the principal. Assumes end-of-year payments.

*All numbers have been rounded up to the nearest $50.

TABLE 25-2
Amount of Principal Needed to Provide a Specified Monthly Income at Various Rates of Interest

Monthly Income Desired

 

Equivalent Annual Interest Rate

 

3%

4%

5%

6%

7%

8%

$   100

250

500

750

1,000

2,000

3,000

4,000

5,000

$ 40,000*

100,000

200,000

300,000

400,000

800,000

1,200,000

1,600,000

2,000,000

$ 30,000

75,000

150,000

225,000

300,000

600,000

900,000

1,200,000

1,500,000

$    24,000

60,000

120,000

180,000

240,000

480,000

720,000

960,000

1,200,000

$    20,000

50,000

100,000

150,000

200,000

400,000

600,000

800,000

1,000,000

$  17,150

42,900

85,750

128,600

171,450

342,900

514,300

685,750

857,150

$   15,000

37,500

75,000

112,500

150,000

300,000

450,000

600,000

750,000

The values above are interest-only payments; payments would continue without change and without liquidating the principal.

*All numbers have been rounded up to the nearest $50.

Systematic Liquidation without Reference to Life Contingencies

Proceeds left with a life insurance company to be liquidated at a uniform rate without reference to a life contingency must be paid out either over a specified period of time, with the amount of each payment being the variable, or at a specified rate, with the period of time over which the liquidation is to take place being the variable. If the period over which the liquidation is to occur is fixed, the amount of each payment depends on the size of the fund, the rate of interest assumed to be earned, the time when the first payment is to be made, and the interval between payments. If the amount of each payment is fixed in advance, the period over which the liquidation is to take place depends on these same factors. An option is available for each situation. The fixed-period option (also called an installment time option) provides payments over a stipulated period of time, while the fixed-amount option (also called an installment amount option) provides payments of a stipulated amount. The two options are based on the same mathematical principles and differ only as to whether emphasis is attached to the duration of the payments or to the level of payments. If the insured or the beneficiary wants the assurance of some income, however small, over a specified period, he or her should select the fixed-period option. If, however, the need is for temporary adequacy of income, irrespective of its duration, the insured or the beneficiary should choose the fixed-amount option. In some situations, the decision will turn on the flexibility under the two options.

Fixed-period Option

Structure of the Option. If a given principal sum is to be liquidated at a uniform rate over a specified period of years, the amount of each annual payment can be derived from a financial calculator or from compound discount tables. For example, if $1,000 is to be liquidated in annual installments over a 20-year period and the undistributed proceeds are assumed to earn interest at the rate of 3.5 percent, the amount of each payment due at the beginning of the year will be $1,000 ÷ $14.71 = $67.98. In other words, the present value of a series of annual payments of $1, at 3.5 percent interest, due at the beginning of the year, for a period of 20 years, is $14.71. If $14.71 will provide $1 per year for 20 years, then $1,000 will provide an annual payment equal to 67.98 times $1 since it takes $14.71 to support each series of $1 payments, and $1,000 will support 67.98. The monthly payment for 20 years at 3.5 percent interest from $1,000 is $5.78.

The amount of annual, semiannual, quarterly, or monthly payment for each $1,000 of proceeds for any period of years can be computed using a financial calculator. The $1,000 amount is entered as the present value using the PV key (clear the financial section of the calculator before starting to calculate). For annual payments enter the number of payments (20) using the n key and enter the annual interest rate (3.5 percent) using the i key. The calculation of payments on a monthly basis requires changing the number of payments (in our example 20 x 12 = 240 total payments) for the n key and changing the annual interest rate to a monthly rate equivalent to the annual rate (in our example 3.5 ÷ 12 = .29166) for the i key. Remember to set the calculator in a beginning of period mode (or due mode) before solving for the payment amount using the PMT key.

Table 25-3 shows the guaranteed installments for each $1,000 of proceeds at 3.5 percent interest. Obviously, the numbers in the table would change if a different interest rate were used.

 

Functional Characteristics. The essence of the fixed-period option is the certainty of the period over which the proceeds will be distributed. Hence any developments that increase or decrease the amount of proceeds available are reflected by variation in the size of the monthly payments and not in the duration of the payments. Additional proceeds payable by reason of the insured’s accidental death increase the amount of the monthly payments. Dividend accumulations and paid-up additions have the same effect. If prepaid or discounted premiums are considered part of the proceeds, they can be applied under a settlement option and, in the case of the fixed-period option, raise the level of payments. (Under the provisions of some policies, however, such premium deposits are treated as belonging to the insured’s estate and do not become part of the proceeds payable to third-party beneficiaries.) Policy loans, if still outstanding at the policy’s maturity reduce the proceeds available and hence the size of the monthly benefits. Some companies permit the beneficiary to repay a policy loan after the insured’s death in order to have the full amount of proceeds payable under a settlement option. Excess interest, if any, may be paid in one sum at the end of each year or added in pro rata proportions to each of the regular benefit payments during the following year.

The fixed-period option is a very inflexible arrangement. The only flexibilities are to permit the beneficiary to choose the date on which the option becomes operative, rather than having it go into effect automatically at the policy’s maturity, and to grant the beneficiary the right of commutation. If the option is designed not to go into operation automatically upon maturity of the policy, the proceeds are held under the interest option until such time as the beneficiary indicates that liquidation should commence. Limited withdrawals are not permitted, presumably because of the administrative expense involved in recomputing the benefits and recasting the agreement after each withdrawal. Insurers are willing, however, to permit the settlement agreement to be terminated by the beneficiary’s withdrawal of all proceeds remaining with the company.

Fixed-amount Option

Structure of the Option. The fixed-amount option is based on the simple proposition of distributing a specified sum each month, or at some other periodic time interval, until the proceeds are exhausted. Mathematically, it is based on the same compound discount function that underlies the fixed-period option. The application is different, however.

TABLE 25-3
Guaranteed Installments per $1,000 of Proceeds (3.5 Percent
Interest), Beginning-of-period Payments

Number of

Years

Payable

 

 

Annually

 

 

Semiannually

 

 

Quarterly

 

 

Monthly

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

$1,000.00

508.60

344.86

263.04

213.99

181.32

158.01

140.56

127.00

116.18

107.34

99.98

93.78

88.47

83.89

79.89

76.37

73.25

70.47

67.98

65.74

63.70

61.85

60.17

58.62

57.20

55.90

54.69

53.57

52.53

$504.34

256.54

173.98

132.72

107.99

91.51

79.76

70.96

64.12

58.66

54.21

50.50

47.37

44.70

42.39

40.37

38.60

37.03

35.63

34.37

33.24

32.26

31.28

30.43

29.65

28.94

28.28

27.67

27.11

26.59

$253.30

128.84

87.41

66.69

54.27

45.99

40.09

35.67

32.24

29.50

27.26

25.40

23.83

22.49

21.33

20.32

19.43

18.64

17.94

17.31

16.74

16.23

15.76

15.33

14.94

14.58

14.25

13.95

13.67

13.40

 

$84.67

43.08

29.22

22.29

18.14

15.37

13.40

11.92

10.78

9.86

9.11

8.49

7.96

7.52

7.13

6.79

6.49

6.23

5.99

5.78

5.59

5.42

5.26

5.12

4.99

4.87

4.76

4.66

4.56

4.48

The principle can be explained in terms of $1,000 to be distributed in equal annual payments of $100, the first payment being due immediately. It is obvious that the liquidation will extend over a minimum period of 9 years since the principal alone will provide payments for that period of time. The problem is to determine how much longer the payments can be continued because of crediting compound interest to the unliquidated portion of the principal.

The first step is to use a financial calculator and enter the known information; then solve for the number of periodic payments that will be made (find n).

In this example calculation, assume that $50,000 is available to be paid out in monthly installments of $3,000 each and the interest earned on the undistributed balance is 4 percent annually. After clearing the financial calculator and setting it in beginning-of-period (due) mode, the entries are as follows: $50,000 is the PV; –$3,000 (note: the sign of the PV must be the opposite of the sign of the payment for the calculator to work) is the PMT; 4 ÷ 12=0.3333% is the monthly interest rate. Then the duration of payments can be found by solving for n. In this example n=18, indicating that the payments will continue for 18 months. The aggregate amount of payments is $54,000, indicating that $4,000 of interest is earned on the $50,000 capital base before the last benefit payment is made.

 

Functional Characteristics. Since the amount of each payment is fixed under this option, any augmentation in the volume of proceeds or interest lengthens the period over which payments will be made; any diminution in the amount of proceeds shortens the period. Thus dividend accumulations, paid-up additions, accidental death benefits, and excess interest extend the period of liquidation, whereas loans outstanding at the insured’s death and withdrawals of principal by the beneficiary shorten the period. This is true even though the payments are to terminate at a specified date or at the occurrence of some specified event, with the balance of the proceeds being distributed in some manner.

The fixed-amount option offers a great deal of flexibility. As with the fixed-period option, the beneficiary can be given the right to indicate when the liquidation payments are to begin. In the meantime, the proceeds will be held at interest, with the interest payments going to the primary beneficiary. Unlike the fixed-period option, the beneficiary can be given either a limited or an unlimited right of withdrawal. Under this option, withdrawals will merely shorten the period of installment payments and will not necessitate recomputing benefit payments.

The beneficiary can also be given the right to accelerate or retard the rate of liquidation. That is, he or she can be given the privilege of varying the amount of the monthly payments, subject to any limitations the insured might wish to impose. For example, the insured might direct the company to liquidate the proceeds at the rate of $3,000 per month, while giving the beneficiary the option of stepping up the payments to $5,000 per month or reducing them to any level acceptable to the company. Under such circumstances, the insured is not likely to prescribe any minimum rate of liquidation.

Furthermore, the beneficiary can be given the privilege of discontinuing payments during particular months of the year or from time to time. For example, when the proceeds of an educational endowment policy are being paid out to a beneficiary who is enrolled in a college or university, payments can be discontinued during the summer vacation months. Similarly, larger-than-usual payments can be provided for months in which tuition and other fees are payable. Such flexibility stems from the fact that the fixed-amount option basically creates a savings account from which withdrawals can be made to suit the beneficiary’s convenience.

Finally, this option can include a provision for transferring the remaining proceeds to another liquidating option. If the transfer is to take place at a specified date or age, contract rates will be available. If the beneficiary has the right to transfer the proceeds at any time, the conversion will be subject to current rates.

Systematic Liquidation with Reference to Life Contingencies

The proceeds of a life insurance policy may be liquidated at a uniform rate over the lifetime of one or more beneficiaries. This type of arrangement, peculiar to life insurance companies, is of very great value. It protects a beneficiary against the economic hazard of excessive longevity—that is, it protects the beneficiary against the possibility of outliving his or her income.

Structure of the Life Income Options

Any settlement option based on a life contingency is called a life income option. The principle underlying a life income option is identical to that underlying an annuity. As a matter of fact, a life income option is nothing more than the annuity principle applied to the liquidation of insurance proceeds. Hence there are as many variations of the life income option as there are types of immediate annuities. Among the single-life annuities, there are the pure or straight life annuity, life annuity with guaranteed installments, the installment-refund annuity, and the cash-refund annuity. There are similar annuities based on two or more lives.

While there is a counterpart among the life income options for every type of immediate annuity, it is not customary for a company to include the whole range of annuity forms in its life insurance policies. The typical policy provides for a life income with payments guaranteed for 10, 15, and 20 years and the installment-refund option. Some companies include the joint-and-last-survivor annuity, and a few show the straight life annuity. Virtually all will make additional options available upon request.

Mathematically, the straight life income option is equivalent to a pure immediate annuity. To be precisely accurate, it is the same as a life annuity due since the first payment is due immediately upon maturity of the policy or upon election of the option, whichever is later. The monthly income provided per $1,000 of proceeds depends on the age and sex of the beneficiary and the insurer’s assumptions as to mortality and interest. Although the schedules of income guaranteed under various insurers’ policies are similar, there is currently little uniformity among companies as to the combination of mortality and interest assumptions used to calculate the income payments. Benefits are provided at net rates, and there is no charge for the use of the life income settlement.

The life income option with a specified period of guaranteed payments is mathematically a combination of a fixed-period installment option of appropriate duration and a pure deferred life annuity. For example, a life income option that promises to provide payments of a specified amount to a beneficiary aged 45 throughout his or her remaining lifetime, and in any event for 20 years, is a combination of a fixed-period installment option running for 20 years and a pure life annuity deferred to the beneficiary’s age 65. If the beneficiary does not survive to age 65, the portion of the proceeds allocated to the deferred life annuity is retained by the insurance company without further obligation.

Since the life income settlement options are essentially annuity contracts available without any applicable sales commissions or other expense loadings, they often provide more benefits for the same contribution than do separate annuity contracts. The only way to be certain that the settlement option is less costly is to make price and benefit comparisons with the annuity contracts available from other insurers. If an annuity contract is found to be more advantageous than the settlement option, that life insurer should be carefully scrutinized to determine its long-term financial strength.

The installment refund option is a combination of a pure immediate life annuity and decreasing term insurance in an amount sufficient to continue payments until the proceeds, without interest, have been paid out in full. (As indicated in chapter 6, this option promises to continue the monthly payments beyond the annuitant’s death until the purchase price of the annuity or, in this case, the proceeds of the life insurance policy have been returned.) At the inception, the term insurance is in an amount equal to the proceeds, less the first payment due immediately, but it decreases with each periodic payment and expires altogether when the cumulative benefit payments equal or exceed the life insurance proceeds committed to the installment-refund option.

The cash-refund option is likewise a combination of a pure immediate life annuity and decreasing term insurance. Since the refund is payable in cash rather than payable in installments, however, a slightly larger amount of term insurance is required.

To use a life income option in planning a client’s estate, the life underwriter needs two types of tables. The first type enables the life underwriter to compute the amount of insurance required to meet the life income needs of the beneficiary or beneficiaries. It shows the amount of principal needed to provide $10 a month under the various life income options for a wide range of male and female ages. The values for such a table, based on one set of actuarial assumptions, are presented in tables 25-4 and 25-5.

The second type of table shows the amount of monthly income that will be provided for each $1,000 of proceeds under the life income options and ranges of ages. After the life underwriter determines how much insurance in multiples of $1,000 is needed, he or she can demonstrate to the client, through the second type of table, exactly how much income can be provided with the actual and contemplated insurance. The values for this type of table, calculated on the same basis as the values for tables 25-4 and 25-5, are shown in tables 25-6 and 25-7.

 

TABLE 25-4
Principal Amount Needed to Provide Life Income
of $10 per Month at Selected Male Ages

 

Age

 

Life Annuity

10-Year

Certain + Life

20-Year

Certain + Life

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

$2,074.72

2,043.45

2,011.56

1,979.00

1,945.73

1,911.70

1,876.88

1,841.21

1,804.65

1,767.18

1,728.77

1,689.46

1,649.31

1,608.41

1,566.86

1,524.77

1,482.26

1,439.45

1,396.43

1,353.31

1,310.18

1,267.12

1,224.21

1,181.51

1,139.07

1,096.96

1,055.28

1,014.12

973.61

933.85

894.98

857.11

820.36

784.85

750.68

717.92

$2,092.4386

2,062.7682

2,032.5134

2,001.6522

1,970.1663

1,938.0465

1,905.2949

1,871.9240

1,837.9573

1,803.4327

1,768.4122

1,732.9815

1,697.2468

1,661.3293

1,625.3595

1,589.4676

1,553.7817

1,518.4284

1,483.5328

1,449.2195

1,415.6112

1,382.8293

1,350.9933

1,320.2200

1,290.6243

1,262.3231

1,235.4283

1,210.0381

1,186.2301

1,164.0560

1,143.5380

1,124.6717

1,107.4297

1,091.7671

1,077.6228

1,064.9197

$2,151.0323

2,126.4265

2,101.7083

2,076.9307

2,052.1523

2,027.4383

2,002.8620

1,978.5044

1,954.4541

1,930.8080

1,907.6737

1,885.1662

1,863.4048

1,842.5077

1,822.5883

1,803.7493

1,786.0778

1,769.6418

1,754.4876

1,740.6381

1,728.0929

1,716.8311

1,706.8147

1,697.9912

1,690.2966

1,683.6587

1,677.9980

1,673.2300

1,669.2662

1,666.0169

1,663.3935

1,661.3114

1,659.6907

1,658.4572

1,657.5428

1,656.8857

Male 1983 Individual Annuity Table

(4 percent interest net rates)

 

TABLE 25-5
Principal Amount Needed to Provide Life Income
of $10 per Month at Selected Female Ages

 

Age

 

Life Annuity

10-Year

Certain + Life

20-Year

Certain + Life

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

$2,237.91

2,208.92

2,179.14

2,148.53

2,117.07

2,084.73

2,051.51

2,017.38

1,982.33

1,946.35

1,909.45

1,871.65

1,832.98

1,793.45

1,753.15

1,712.08

1,670.28

1,627.71

1,584.36

1,540.18

1,495.16

1,449.38

1,402.92

1,355.91

1,308.52

1,260.89

1,213.21

1,165.59

1,118.20

1,071.14

1,024.57

978.63

933.48

889.29

846.23

804.47

$2,244.7293

2,216.6597

2,187.8547

2,158.3038

2,127.9981

2,096.9326

2,065.1151

2032.5550

1,999.2603

1,965.2489

1,930.5356

1,895.1533

1,859.1360

1,822.5286

1,785.3961

1,747.7927

1,709.7883

1,671.4403

1,632.8252

1,594.0268

1,555.1662

1,516.4019

1,477.9123

1,439.8962

1,402.5704

1,366.1510

1,330.8508

1,296.8726

1,264.4172

1,233.6701

1,204.8069

1,177.9807

1,153.3068

1,130.8537

1,110.6411

1,092.6360

$2,272.6161

2,247.8142

2,222.5817

2,196.9426

2,170.9289

2,144.5825

2,117.9610

2,091.1317

2,064.1720

2,037.1739

2,010.2380

1,983.4812

1,957.0284

1,931.0152

1,905.5879

1,880.8914

1,857.0756

1,834.2843

1,812.6609

1,792.3413

1,773.4541

1,756.1091

1,740.3840

1,726.3185

1,713.9114

1,703.1193

1,693.8614

1,686.0267

1,679.4831

1,674.0847

1,669.6856

1,666.1476

1,663.3430

1,661.1568

1,659.4863

1,658.2403

Female 1983 Individual Annuity Table

(4 percent interest net rates)

TABLE 25-6
Monthly Lifetime Benefit for Male per $1,000 Annuity
Purchase (Net Rates)

 

Life Annuity

10-Year

Certain + Life

20-Year

Certain + Life

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

$4.82

4.89

4.97

5.05

5.14

5.23

5.33

5.43

5.54

5.66

5.78

5.92

6.06

6.22

6.38

6.56

6.75

6.95

7.16

7.39

7.63

7.89

8.17

8.46

8.78

9.12

9.48

9.86

10.27

10.71

11.17

11.67

12.19

12.74

13.32

13.93

$4.78

4.85

4.92

5.00

5.08

5.16

5.25

5.34

5.44

5.54

5.65

5.77

5.89

6.02

6.15

6.29

6.44

6.59

6.74

6.90

7.06

7.23

7.40

7.57

7.75

7.92

8.09

8.26

8.43

8.59

8.74

8.89

9.03

9.16

9.28

9.39

$4.65

4.70

4.76

4.81

4.87

4.93

4.99

5.05

5.12

5.18

5.24

5.30

5.37

5.43

5.49

5.54

5.60

5.65

5.70

5.75

5.79

5.82

5.86

5.89

5.92

5.94

5.96

5.98

5.99

6.00

6.01

6.02

6.03

6.03

6.03

6.04

Male 1983 Individual Annuity Table

(4 percent interest net rates)

TABLE 25-7
Monthly Lifetime Benefit for Female per $1,000 Annuity Purchase (Net Rates)

 

Age

 

Life Annuity

10-Year

Certain + Life

20-Year

Certain + Life

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

$ 4.47

4.53

4.59

4.65

4.72

4.80

4.87

4.96

5.04

5.14

5.24

5.34

5.46

5.58

5.70

5.84

5.99

6.14

6.31

6.49

6.69

6.90

7.13

7.38

7.64

7.93

8.24

8.58

8.39

9.34

9.76

10.22

10.71

11.24

11.82

12.43

$4.45

4.51

4.57

4.63

4.70

4.77

4.84

4.92

5.00

5.09

5.18

5.28

5.38

5.49

5.60

5.72

5.85

5.98

6.12

6.27

6.43

6.59

6.77

6.94

7.13

7.32

7.51

7.71

7.91

8.11

8.30

8.49

8.67

8.84

9.00

9.15

$4.40

4.45

4.50

4.55

4.61

4.66

4.72

4.78

4.84

4.91

4.97

5.04

5.11

5.18

5.25

5.32

5.38

5.45

5.52

5.58

5.64

5.69

5.75

5.79

5.83

5.87

5.90

5.93

5.95

5.97

5.99

6.00

6.01

6.02

6.03

6.03

Female 1983 Individual Annuity Table

(4 percent interest net rates)

Functional Characteristics

Since the life income option contemplates the complete liquidation of the proceeds during the beneficiary’s lifetime, it follows that any circumstances that enlarge the volume of proceeds will increase the amount of each periodic payment, while shrinkages in the proceeds will decrease the size of the payments. In this connection, it is interesting to note that excess interest is usually payable only under the annuity form calling for a guaranteed number of payments and, even then, only during the period of guaranteed installments. This is another way of saying that excess interest is payable on the portion of the proceeds applied under the fixed-period installment option but is not payable on that portion of the proceeds allocated to the deferred life annuity. Some companies guarantee a lower rate of interest on the fixed-period option portion of the arrangement than under the deferred life annuity.

The life income option is extremely inflexible. Benefits are calculated on the basis of the age and sex of the primary beneficiary, and once the payments have begun, no other person can be substituted for the designated beneficiary, even with an adjustment in the benefits. No right of withdrawal is available and no commutation privilege exists for benefits payable under a deferred life annuity. Otherwise, persons in poor health would be inclined to withdraw the proceeds. When the benefits are guaranteed for a specified period of time, however, a few companies will permit the proceeds payable under the fixed-period installment option to be commuted. If the commutation privilege is exercised, the beneficiary is usually given a deferred life annuity certificate. This certificate provides for life income payments to the beneficiary if he or she survives the period during which the guaranteed payments were to have been made.

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