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An Example of Annuity Prize Payment Procedures
The California Lottery currently uses different payment methods for prize awards. Some prizes are paid in one lump sum, and some are paid on an installment basis. ‘Big Spin’ Grand Prizes of $1,000,000 or more and SUPER LOTTO jackpot prize payments consist of principal and interest paid over a 20-year period funded by U.S. Treasury zero coupon bonds. The Lottery purchases these bonds with the principal, the money in the prize pool, and the rest of the prize is made up of the interest the bonds earn. The advertised jackpot prize is the annuitized total-principal plus interest - over 20 years.
For example, for a $1 million prize, the Lottery has about $500,000 cash on hand - $50,000 is paid immediately to the winner and the remaining $450,000 is used to purchase 19 U.S. Treasury bond annuities for a total value of $950,000 over 20 years. Each year one of the annuities matures, allowing an annual payment cycle, no funds remain in the account. The Lottery does not realize any profit on these investments.
This annuity payment procedure is common in the U.S. lottery industry as well as other organizations offering large prizes in special promotions. Through this bond investment system, more and larger prizes are allowed than would otherwise be available.
SUPER LOTTO Jackpot prize shares under $1 million, a rare occurrence, are paid in equal installments of at least $50,000 per year, until the total prize allocation is satisfied. The annual annuity method described above is used, but terminates in less than 20 years.
The graph below shows an example of the principal to interest ratio over a 20-year payment period of a million dollar prize. It illustrates that towards the end of the payment schedule, most of the $50,000 annual payment is obtained through interest on the bonds while in the beginning, most is paid by the principal in investment monies. At the end of the payment cycle, all $1 million of the prize is paid to the winner (less tax deductions as required by Federal law).
