DEFINITION of 'Commutation'

The right that a beneficiary has to exchange one type of income for another. Commutation is offered to beneficiaries of annuities and life insurance policies, so that they might receive a lump-sum payment instead of a series of future payments. When this happens, the net present value of all remaining payments is computed into a single payment that is given to the beneficiary.

BREAKING DOWN 'Commutation'

The right of commutation can provide a larger sum of money to a beneficiary who needs it now. This can be a tremendous boon for those who need cash to pay for medical or other bills that cannot wait. However, this right must be accorded to the beneficiary in the policy.