ACTUARIALLY EQUIVALENT

Two sets of numbers, or payment methods (e.g., a lump sum, on the one hand and an annuity "stream" of payments, on the other) that have an equal value.  Specialized mathematicians calculate actuarial equivalents, and other "actuarial" values by using certain "actuarial assumptions."  In essence, these actuaries use a specialized form of "present value of money" calculations to determine values (or equivalence).  What these specialized mathematicians add to regular "presrnt value" calculations are certain assumptions concerning, for example, life expectancy, or "mortality" [the probability of death].  In most pension calculations they also use certain assumptions concerning futire sl  These are called "actuarial assumptions."

For example, suppose that we are trying to determine the lump sum "actuarial equivalent" of a monthly $1000.00 annuity guaranteed for the life of a 50 year old male.  What's it worth in, say. a lump sum? What might we consider?

• Interest during the payout period

• What is the payout period?  (How long would we assume (an actuarial "assumption") a 50 year old will live?  Hint:  Use a "mortality table."

Two different payment methods are considered to be in  in an "actuarial equivalence" when they have an equal present value under a given set of  actuarial assumptions.

For more information, from really good actuarial "geeks" go to: