Investor's wiki



What Is Commutation?

Commutation alludes to the right that a beneficiary needs to exchange one type of income for another. Commutation is offered to annuitants and to the beneficiaries of life insurance strategies so they could receive a lump-sum payment rather than a series of future payments. At the point when this occurs, the net present value (NPV) of all leftover payments is processed into a single payment that is given to the beneficiary or to the annuitant.

Understanding Commutation

Commutation can give a bigger sum of money to a annuitant or to a beneficiary who needs it now. This can be a huge assistance for the individuals who need cash to pay for medical or different bills that can hardly stand by. Be that as it may, this right must be agreed to the beneficiary in the policy.

The annuitant will profit from a higher level of certainty in their financial life by making due with a certain immediate amount as opposed to an uncertain future amount. The insurer will remain to save money on administrative costs associated with monitoring and assortment activities with respect to the insurer.

For the insurer, a commutation can assist with achieving a clean break in the relationship between the insurance company and the insured, which can assist them with exhibiting improvements in financial performance after some time while wiping out the obscure factors that might be associated with a tedious settlement period, which might experience unexpected risks.

Permitting beneficiaries of a committed payment to choose how they might want to receive their funds can likewise reduce an insurer's burden since certain individuals will pick one form over the other in light of their personal conditions. Thus, they can save money on both allocated and unallocated loss adjustment expenses and even mark a marginal gain in the underwriting spread.

Commutation in Practice

Frequently, a crippled individual will change over their laborers' compensation periodic payment claim for life into a single lump-sum payment. A liability claim might be settled with a structured settlement, wherein the risk bearer gives a fixed series of future value payments to the claimant via a structured settlement provider at a discounted current cost paid to that structured settlement provider.

The insurer and beneficiary both hope to some way or another work on their financial standing as an outcome of a commutation. The two players think about the differences between them, with respect to the ultimate claim and expense liability, timing recognition, tax position, and accounting treatment, and these differences become factors viable in the course of a commutation negotiation.


  • Beneficiaries might decide to swap a lump-sum payment for a series of progressing cash flows, or the other way around.
  • A commutation arrangement can really assist an insurer with saving money on loss adjustment and administrative expenses and make underwriting gains.
  • Commutation permits the beneficiary of an obligation, like an annuity or insurance policy, to change how they would like to receive their payment.