Do all life insurance companies apply an actuarial discount in living benefits calculations? What exactly is an actuarial discount when it comes to life insurance and how is it calculated? These are some common questions we’ve received. In this post, we would outline how exactly is the actuarial discount calculated when it comes to life insurance with living benefits.
Here are the questions we would answer
If you have any specific questions or would like us to review your options for life insurance with living benefits, simply reach out to us. You can do so by giving us a call, send us a message, or simply view your instant quote.
What are living benefits in life insurance
The main point is that living benefits could allow you to use your life insurance policy while you are still alive. In other words, you do not have to die for your insurance to payout. If you are diagnosed with an eligible condition, you can file a claim to accelerate your death benefit. Some of the conditions include a heart attack, stroke, invasive cancer, or End-Stage Renal failure, making living benefits even more beneficial if diagnosed with diabetes.
Essentially these policies allow you to financially survive what you are physically going through
What is an actuarial discount
Many companies use an actuarial discount to calculate the benefit you could receive. An actuarial discount is applied based on the type of condition you are accelerating your life insurance for and your life expectancy.
Let us explain:
If you have an insurance policy and are diagnosed with invasive cancer, you could file a claim to accelerate your death benefit. In other words, use your life insurance policy while you are still alive. You can decide if you need to accelerate the entire policy and receive as much as possible TODAY or do a partial acceleration.
The company would review your current medical records and try to assess your life expectancy, based on your doctor’s note. Companies use an internal formula that they use to calculate how much it gets paid out on living benefits.
Most simply put, the higher the chances you have of surviving the condition, the less you would receive as a result of the acceleration. The more severe the condition is and if it significantly shortened your life expectancy, you would receive more.
Here is a simple break down of the payment determination:
Eligible Death Benefit (For example $250,000)
-Actuarial Discount (For example 40%)
-Administrative Fee (For example $500)
= Accelerated Benefit Amount of $99,500
In other words, you could receive a payment of $99,500 TODAY. You would be in charge of how to use the funds. You can pay off medical bills, seek alternative treatment, or create lifelong memories.
Do every company apply actuarial discount
No, not every company uses an actuarial discount when they calculate the available benefit. Some companies use a flat percentage or amount.
The example above is just one-way companies calculate an accelerated benefit. Instead of applying an actuarial discount, some carriers opt-in for a fixed payment amount. In other words, you know that should you be diagnosed with invasive cancer, for example, you would receive an ‘X’ amount regardless of life expectancy.
Here is an example of how it may work:
Some companies would allow up to 25% of the death benefit to be accelerated, but no more than $50,000. Should a person is diagnosed with a critical illness, he or she would receive 40% of the accelerated amount.
Here is a break down of a $250,000 death benefit:
- You could accelerate 25% up to $50,000 (in our example: the max is $50,000)
- You could receive 40% of the allowed amount (in our example $50,000 x 40% = $20,000)
In other words, if you have a $250,000 life insurance policy and you are diagnosed with a critical illness, you could receive a payment of $20,000 today and still have $200,000 in life insurance.
This would be considered a partial acceleration. Please note that in the first example, we demonstrated a complete acceleration. A partial acceleration is also possible and would result in a different calculation.
Which option is better
Now, this is the question many of our clients ask us. Is it better to have an actuarial discount in living benefits calculations or a designated amount?
We would list the pros and cons of each and we would let you decide:
- If the condition is significantly affecting your life expectancy, you could receive up to 90% of the death benefit. This would mean that your family would have more money in their pockets today.
- More companies use the actuarial discount and you would have more carriers to choose from.
- Clients could feel it is too uncertain and are afraid that the company would try to offer them a lower percentage
- If the condition is not severe or it does not have a major impact on your life expectancy, you would receive a lower offer.
- Clients feel in control as the benefit is predetermined. They know exactly the amount that would be available to them if they are diagnosed with a qualifying condition.
- It doesn’t take into account the severity of the condition and it could result in a lesser payment.
- Not many companies offer flat amount/percentage and typically the ones that do, don’t have as many qualifying conditions. This could limit the choice of company or product.
What we want you to take away from this article is that there are several ways your accelerated benefit could be calculated. Most companies use an actuarial discount, while some utilize a flat percentage or amount. Regardless which way you find better for you, we are strong believers in having options. Therefore, we would highly recommend a policy with living benefits to all of our clients.
We hope you find this helpful and are looking forward to helping you find the protection you need!