Actuarial Equivalent

What Does Actuarial Equivalent Mean?

An actuarial equivalent refers to the method of calculating the value of cash payments that will be made in the future as policy benefits. This calculation is used to determine the appropriate premium amount to charge. It also serves as a way to compare the benefits of two different policies.

Insuranceopedia Explains Actuarial Equivalent

Actuarial equivalent calculations help answer key questions such as: How will the insured receive their benefits? How much will they receive on a regular basis in the future when it’s time for the insurer to pay? What is the specific schedule for benefit payments? Actuaries address these questions when determining the actuarial equivalent. These calculations also guide the decision on how much premium to charge.

Other factors influencing these calculations include life expectancy, return on investments, interest rates, and salary. These same variables explain why life insurance premiums differ so much from one applicant to another, since the actuary’s projection of future payouts directly sets what each policyholder pays today.

Additionally, actuarial equivalent plays a crucial role in helping individuals decide which policy best suits their needs. Two policies with the same face amount can carry very different actuarial values once interest rates and payout schedules are factored in, so price alone is a poor way to compare them. Checking the average cost of life insurance for your age range gives a useful reference point before you start looking at quotes.