My Math Forum How to divide insurance payout fairly

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 May 25th, 2012, 01:09 AM #21 Senior Member   Joined: Apr 2011 From: USA Posts: 782 Thanks: 1 Re: How to divide insurance payout fairly Giving the same information, with the same numbers and the same titles, isn't telling me anything at all. It gives me nothing I didn't already have. If any of my assumptions were incorrect, please just TELL me what they were instead of sending me more numbers that look the same. If my assumptions are correct, then you have my opinion. I have no idea what your question is about the other set of payments. Yes, that's the future value of them. What about it?
 May 25th, 2012, 04:47 AM #22 Member   Joined: May 2012 From: Sydney Australia Posts: 30 Thanks: 0 Re: How to divide insurance payout fairly Thank you 4 input. I hope the following explanation would make it clearer (refer to pdf or excel spreadsheet): Yearly dividends (current dividend in my spreadsheet) received were used to buy additional amounts of participating insurance called "dividend additions" or Paid Up Additions (PUA) and payable on the occurance of the accident. Total PUA sum insured is equal to Buy Paid Up Additions (PUA) + Previous year Total PUA Sum Insured. Hence, money in curent dividend and Buy PUA already included in Total PUA Sum Insured that would be payable when accident happened or stopped premium payment. Total PUA cash value is the surrender value that you would get when you stopped premium payment or surrendered the insurance but if accident happened you get the sum insured not the PUA cash value. As the face value/sum insured $25,000 was paid at year 22 due to the accident, can it be treated similar to a fixed deposit that you paid$348.25 yearly and got the principal plus compounded interest at end of year 22 $25,000? If so, we can use FV and applied the same method we calculate$10913.33 ($35,913.33-$25,000). To justify Mr A 8 year contribution to get the dividends/bonuses snowballing, is there a method/formula to calculate compensation (you got nothing in the first 2 years with insurance policy if you stopped the premium)? Your opinion would be appreciated.Thank you. Regards Thirst4answer. Thank you
May 25th, 2012, 08:47 PM   #23
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Re: How to divide insurance payout fairly

Basically it sounds like nothing is different than I already thought, meaning my opinion on any of this would not change. I only needed to know what a PUA was. (I can figure out the math of the rest of it - I mean, I can see that you're accumulating it. The math isn't the issue - it's knowing what the terms mean.) If it's the insurance company adding this on, and not A and B, then it changes nothing of what I already said. If it's the insurance company adding this, then it's part of the earnings and not part of any payment. That's all I really needed to know.

Quote:
 Originally Posted by thirst4answer As the face value/sum insured $25,000 was paid at year 22 due to the accident, can it be treated similar to a fixed deposit that you paid$348.25 yearly and got the principal plus compounded interest at end of year 22 $25,000? If so, we can use FV and applied the same method we calculate$10913.33 ($35,913.33-$25,000).
I would count as the future value whatever it is they are actually getting. Regardless of how everything came out, whatever it is that they are getting IS the future value because that's what they are getting out of it. So that's what you'd use to calculate the interest. If there was an accident and they are actually getting the $25,000 then include that like you originally did. Something you said made it seem as though there wasn't an accident. It really doesn't matter to me what they are or are not getting, and I don't even need to know that. You just need to know that whatever it is (35,913.33 then?), that's what you should use as a FV to get the interest. If that's the correct amount, then it's your original 11.97% or whatever it was. Quote:  To justify Mr A 8 year contribution to get the dividends/bonuses snowballing, is there a method/formula to calculate compensation (you got nothing in the first 2 years with insurance policy if you stopped the premium)? Not sure what you are referring to. They didn't stop paying the premium so why does this matter? In the end, it's the same thing I was saying before. Use whatever they are going to get as the future value - you are the one who knows what that is. Once you have that rate (if it's the 11.97% then use that), then just calculate the future value of A's payments only. Since A stopped paying after a certain time, the first part of it is an annuity and then it turns into a lump sum. If you don't know how to do that, I can calculate it once we're sure what interest rate we're using. Once you have that number, you can just subtract from the total they're getting to get B's portion of it.  May 26th, 2012, 05:40 AM #24 Math Team Joined: Oct 2011 From: Ottawa Ontario, Canada Posts: 14,412 Thanks: 1024 Re: How to divide insurance payout fairly Boy oh boy... Thirst4answer: WHERE does this come from anyway? Are you a student learning how to handle financial formulas? Do you work for an Insurance Co. and this is a REAL case? The purpose of this site is to help students, not interpret insurance claims...  May 26th, 2012, 06:20 AM #25 Member Joined: May 2012 From: Sydney Australia Posts: 30 Thanks: 0 Re: How to divide insurance payout fairly Well, I am a financial student and have been asked to help two of my relatives to divide the insurance settlement fairly. I have pointed out that Mr A contributed first 8 years but left all his entitlement that would compound yearly there till another 14 years whereas Mr B contributed the remainder 14 years and also left his entitlement that would also compound yearly there till year 22. Please help. Thank four your input. Regards thirst4answer.  May 26th, 2012, 04:10 PM #26 Member Joined: May 2012 From: Sydney Australia Posts: 30 Thanks: 0 Re: How to divide insurance payout fairly I lost my posting while sending it to this forum and could not find it here. So I made another trial... I got two different answers when I applied FV in the following ways: (1) Treat the total settlement as a whole ($35,913.33 i.e. combined the contingent/insured amount $25,000 in$35,913.33). I got for Mr A $23,315.98. (2)Separately calculate$25,000 and $10913.33 with interest rates 0.09339 and 0.029689 as the former is static (would not change with time) and payment of it was contingent upon "occurance of accident"; whereas the later changed with time (due to compounding effect). I got for Mr A$19,635.49 ($4796.76 & 14,838.73). Which one would be the correct answer? May 26th, 2012, 07:24 PM #27 Senior Member Joined: Apr 2011 From: USA Posts: 782 Thanks: 1 Re: How to divide insurance payout fairly Quote:  Originally Posted by Denis The purpose of this site is to help students, not interpret insurance claims... Since when is it only for students or did you just now make up that rule? It's for math. While this has been far from the easiest topic to follow , it's still about financial math. May 26th, 2012, 09:50 PM #28 Senior Member Joined: Apr 2011 From: USA Posts: 782 Thanks: 1 Re: How to divide insurance payout fairly Quote:  Originally Posted by thirst4answer (1) Treat the total settlement as a whole ($35,913.33 i.e. combined the contingent/insured amount $25,000 in$35,913.33). I got for Mr A $23,315.98. (2)Separately calculate$25,000 and $10913.33 with interest rates 0.09339 and 0.029689 as the former is static (would not change with time) and payment of it was contingent upon "occurance of accident"; whereas the later changed with time (due to compounding effect). I got for Mr A$19,635.49 ($4796.76 & 14,838.73). I would not use #2 because it doesn't make any sense. Money is NEVER static when time is involved. These two people are making payments into something and tying up money that could be used elsewhere (look up opportunity cost, which as a financial student you should already know), so it doesn't matter if the$25,000 isn't going to change. If you won the lottery and you could get $20 million now or in 5 years, it's the same$20 million, but would you consider them worth the same? If they got it 5 years ago, with 5 less payments from B, do you think A or B would consider that static? Besides, you used a rate on it, as though the time value of this money still counts.

The other reason it doesn't work is because you're doing it as though they stuck the 348.25 in twice. It would be like two different investments (at lower rates so that our total FV can come out the same anyway), and putting 348.25 into each of them. And then you're calculating A as though he put 348.25 into it twice, into two different things, for the 8 years. The lower rates are somewhat accounting for this, but not exactly, hence, a different answer. But that isn't the way it happened - there weren't two payments in two different investments. If you wanted to consider that "static," you wouldn't do it this way. (I'm not even sure what would be appropriate if you tried that.)

There's definitely ways you could make this more complicated, and perhaps call it "more fair." But I don't see the point, because in the end, the investment did come out earning 11.967% over the life that existed. I think it's totally fair to just use how the average of the earnings really came out, and using that same rate based on one total FV essentially then simplifies it to only worrying about who put in how much, and when. Yes, there are other ways to look at it, but I believe this is fair, and keeps it from getting even more complicated and complex.

Here's another way to look at it. I invest in mutual funds only. I'm not doing individual stocks (or bonds), but the fund is. So the fund is invested in all sorts of different things, all earning different amounts, prices going up and down, things being sold or bought, etc, etc, etc. The total overall average that's earned over the time I have it is really what the fund earned, and yes it would be different if I sold the fund earlier, or later. But in the end, my average return is what it is, regardless of all those details going on inside the fund. And in fact, I would never see all those details. So treat this like that and pretend you don't see any of those details. You just know how much they got out of it, and who put what in, and when. And leave it at that.

One thing I did think of - these 2 paid 25% of it. Is the $25,000 also 25%? i.e. the face value is actually$100,000? If not, then that part is actually screwed up. If so, then leave it be as it and give A the 23K you came up with.

 May 26th, 2012, 10:14 PM #29 Senior Member   Joined: Apr 2011 From: USA Posts: 782 Thanks: 1 Re: How to divide insurance payout fairly Just for the heck of it, because I wanted to see, I tried doing something that I thought might make the $25K "static." I knew that it was unfair to just pro-rate that based on their total payments. A would only get around$13K total, which is far too little for the long time that money was tied up. So I figured it was better to take the actual earnings into consideration, i.e. the $10,913.33. That's what their payments are technically "earning." So I took A's share of that, the 4798.50 amount, which would be at 2.97%. I then took that as a proportion to the$10,913.33, which is about 44%. Then applied that proportion to the $25K. That would be$10,992.29 of it. In a way, that "felt" fair, because A put enough in to allow for about 44% of the earnings. That only came out to $15,790 total, which did not feel right to me. But I couldn't explain why it would come out so low. So... that gave me the idea to see what overall average rate A would have earned on his payments if he got$15,790 out of it. And then B would get \$20,123 out of it. I did this properly, considering when they made the payments, etc. (In other words, the same way we got all the other rates.) A's came out to around 9.5% and B's came out to around 17.5%. Not really quite fair, huh? Seeing that, it kind of really struck me that it's so much more fair that they both earn the exact same percent, and leave it be. BTW, the math on your spreadsheet is wrong. Actually stick in equations for the H column (H8+F9 & copy down), and see how it comes out.
 May 27th, 2012, 06:19 AM #30 Math Team   Joined: Oct 2011 From: Ottawa Ontario, Canada Posts: 14,412 Thanks: 1024 Re: How to divide insurance payout fairly Hey Thirst, after you've "finally" decided on A's and B's portions, you then need to embark on a secondary mission. This "account" was set up under A's name, and B theoretically HELPED out by making up what A couldn't pay, thus "lending" A a few bucks to help coming up with the required premiums. Now, the taxable earnings would have ALL been considered to be A's, thus A would have paid income tax on these. So now, you need to call A in for an interview, with his income tax returns for the 22 years, to figure out how much taxes he paid. And finally, this amount would be manipulated in a way where B pays his share of this, again on a "fair" basis. Ahem.

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