|
Creative Use of Guarantees
Even a life annuity with no guarantee (which stops on the death of the annuitant) has a very large intrinsic value. One cannot say that Old Age Security has no value because the payment stops on death. Because of this “built-in guarantee” that is based on how long the actuaries anticipate the income stream will pay, the price of minimum guarantees for young people can be very inexpensive.
To buy $10,000.00 annual income, payable monthly at the rate of $833.34, and growing at 2% per annum, compounded for the life of an 18-year old female costs $283,059.46. Below are the costs of this income stream with various guarantees.
|
18-year old female – standard mortality
Lifetime income of $10,000.00 per year ($833.34 per month), indexed at 2% per annum, compounded.
|
|
Guarantee
|
Annuity
Cost
|
Guarantee
Cost
|
|
0 years
|
$283,059.46
|
n/a
|
|
10 years
|
$283,445.93
|
$386.47
|
|
20 years
|
$284,445.94
|
$1,386.48
|
|
30 years
|
$285,647.94
|
$2,588.48
|
|
40 years
|
$287,045.31
|
$3,985.85
|
When dealing with litigation and traumatic injuries, the plaintiff upon whose life the annuity is based, is frequently substandard. That is, their life expectancy is not normal (see McKellar Minute Issue 3, Impaired Life Annuities). Let’s assume that the 18-year old female is rated +30 years because of a spinal injury resulting in quadriplegia. The price of the same income for the life of the female decreases, as shown in the chart below, but the price of the guarantee increases because it is negating the mortality gain the life insurer can achieve from early death. Guidance by an experienced broker is required to select the most appropriate guarantee.
|
18-year old female - +30 year impairment rating
Lifetime income of $10,000.00 per year ($833.34 per month), indexed at 2% per annum, compounded.
|
|
Guarantee
|
Annuity
Cost
|
Guarantee
Cost
|
|
0 years
|
$221,341.96
|
n/a
|
|
10 years
|
$222,534.83
|
$1,192.87
|
|
20 years
|
$226,123.78
|
$4,781.82
|
|
30 years
|
$232,743.59
|
$11,401.63
|
|
40 years
|
$244,609.54
|
$23,267.58
|
Once there is a guarantee on the income stream, it is a question of who should receive it. In most cases the income stream will be left to a family member or the estate of the primary plaintiff. Canada Revenue Agency permits the income stream to continue after death on a tax-free basis provided that it is not going back to the Defendant’s insurer.
Various arrangements can be made to share the guarantee. It can be split 50/50 (75/25, etc.) so that in the event of the premature death of the plaintiff, half of the payments go to the named beneficiary or estate, and half reverts to the Defendant’s insurer. The Defendant’s insurer has the right to commute (cash in) the payments. The personal beneficiary must take the monthly payments as they fall due. The guarantee can be shared in many creative ways. One can agree that if the death occurs within the first 10 years, the guaranteed payments will revert to the Defendant’s insurer, but after 10 years will pay to the named beneficiary or estate.
The guarantee can also be created by writing on more than one life. For example, the structured settlement can be written on the lives of both a husband and a wife. This means that the payment stream will continue on a tax-free basis so long as either one remains alive.
Frequently for SABS (Statutory Accident Benefits Schedule) claims the insurer will want a 100% reversion (benefit) of the guarantee because under the SABS legislation the payments cease on death.
There are a number of innovative ways which the guaranteed income stream can be scheduled to pay after the death of the plaintiff. Your broker can suggest what is best for the situation at hand.
|
|
