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8.5 Life Expectancy Principles

In providing the instructions, the AGA has adopted the same principles that underpin lifetime annuities.  That is, a life insurance company will pay an annuity for life, in exchange for an up-front lump sum premium.  A lifetime annuity is payable for the rest of a person's life.  The amount of the periodic annuity depends on certain assumptions, particularly the life expectancy of the person and the rate of interest to be earned on the invested lump sum.  Life expectancy is based on Australian Life Tables which are published every five years following the national census. Because interest is earned on the invested lump sum, the total of annuity payments over the lifetime of the person is expected to be more than the initial lump sum premium.  Hence the total dollar amount offset against a veteran's Disability Compensation Payment over their lifetime is expected to exceed the amount of the lump sum of other compensation received.  The situation of exceeding the initial lump sum amount is compounded for a person who lives beyond their life expectancy.