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Generally speaking, the pension fund liability is usually a higher liability than the life insurance policy. This is because a pension fund is required to make annual payments to an individual for the remainder of his life. In contrast, a life insurance policy is a lump sum payment paid out at the time of death. The likelihood of a person dying during the policy period is low; consequently, the liability is low. Example: A person, aged 50 years, has been working for a company for 20 years and is expected to retire at age 65 with 35 years. If he retires at age 65, he will receive a lifetime annual benefit of $40,000 / year. Also, the person has a life insurance policy of $500,000, which will be paid out if he dies before age 65. Probability the person dies before age 65 is probably less than 15%. Expected liability on the life insurance policy is 15% x $500,000 = $75,000. Probability the person lives to age 65 = 85%. The expected future lifespan of the individual (given that he has lived to at least 65 is 17 years). Thus, the pension liability is 17 x $40,000 = $680,000.

by zeuz

3 weeks ago

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