DEFINITION of Actuarial Equivalent
Actuarial equivalent refers to the condition where two insurance benefit plans are at least equivalent in value, after calculating the present value of their cash payments under a given set of appropriate actuarial assumptions. Benefit plans are said to be actuarially equivalent when the present value of future payouts is the same.
BREAKING DOWN Actuarial Equivalent
Actuarial equivalence estimates are used for calculating benefits and comparing plan coverage. Actuarial equivalent is calculated on the basis of life expectancy, return on investments, interest rates and how much people earn.
By calculating possible payouts, a plan sponsor can decide what premium to charge and what liquid assets should be kept in reserve to cover payments. But because plans are calculated on an average rather than an individual basis, policyholders will still face different out-of-pocket costs under different plans.