Commutation

What Does Commutation Mean?

Commutation refers to the change in the mode of payment. In insurance, it means that the payout can be modified, such as converting a series of periodic payments into a lump sum or vice versa.

Insuranceopedia Explains Commutation

Commutation occurs when a party is dissatisfied with the current payment system and has the legal right to modify it. For instance, a debtor may request their lender to break down a large payment into a series of smaller amounts to facilitate more manageable debt repayment.

In the context of insurance, the beneficiary of an annuity can request the insurer to convert the death benefit into either a lump sum or a series of payments, providing a reliable source of income. The better choice between a lump sum and periodic payments depends on the type of annuity in the original contract and the beneficiary’s tax situation. The paperwork involved is similar to what beneficiaries deal with when they collect life insurance, since the insurer needs death certificates and claim forms before any payout method can be changed.