In order to price a life insurance policy correctly, insurance companies of course have to weigh the odds that they will have to pay the death benefit as well as to determine when they have to pay it (payment now is much more costly than payment in ten-years’ time). Obviously it is extremely difficult to predict when an individual will die, but for a large population of individuals, statistical predictions become much more accurate.
In order to establish statistical probabilities, historic data about life spans and health factors is compiled for large populations of people. Actuaries both compile this information and then use it to generate equations to calculate probability. These equations are represented in Actuarial Mortality Tables (sometimes referred to as “Life Tables”), which are essentially tabular or graphical representation of life expectancy. These tables can be generated based on age, gender, socio-economic status, lifestyle choices, general state of health and veritable plethora of other factors.
There are two main types of Actuarial Mortality Tables used by insurance companies: A Period Life Table and a Cohort Life Table. A Period Life Table only concerns the life expectancy of the current year, while a Cohort Life Table takes into consideration the current year of life expectancy and projections into future years, because life expectancy will fluctuate slightly from year to year depending on medical advancements and other factors.
Actuarial Mortality Tables are separated between males and females because on average females tend to live longer than males. After those two classifications, the next major one is age. Obviously, the younger you are the longer you will live. After those two classifications, percentages are given under the headings of death probability, number of lives and life expectancy.
When reading an Actuarial Mortality table there are several standard terms:
Death probability measures the odds that a person will pass away in the next year and is represented as a percentage.
Number of lives represents how many people out of a population of 100,000 will remain at the end of that year. For example, a new born male’s number of lives is 100,000 (virtually no one-year-olds die), while a 111 year old male’s number of lives is 1 because, on average 1 out of every 100,000 people will live to be 111. (This is according to an Actuarial Mortality Table done in 2007 by the United States Social Security Office.)
Life expectancy is the age a person is expected to live to. According to the 2007 Actuarial Mortality Table, a newborn male is expected to live to the age of 75.38, while a newborn female is expected to live until the age of 80.43.
Private insurance companies use the factors in these tables to price life insurance policies. Each insurance company leverages its own historic data as well to tweak public information. However, public information is extraordinarily valuable, as federal regulations require insurance companies to share their data with the government. In addition to using this information to regulate the industry, government agencies, such as the United States Social Security Administration, use this information to model government insurance plans, including social security. Each year, information is presented to the United States Congress to estimate future income and expenditures of the Old-Age, Survivors and Disability Insurance program. Actuarial Mortality Tables underlie these projections.
By understanding the Actuarial Mortality Tables, we hope that you have better insight into how the insurance companies use the information contained therein to price the insurance policy offered to you. You can also use this information to identify where the probability of mortality increases for your demographic. You may be able to alter you policy requirements, such as opting for a 10-year policy rather than a 20-year policy, and investing the difference in premiums to “self-insure” the second decade.
Knowledge is power, and insurance is peace of mind. Educating yourself about the intricacies of insurance policies will help you maximize your peace of mind while minimizing your cost. Use this knowledge and our free online servicesto find the right life insurance policy for you and your beneficiaries.