What you pay for life insurance is directly related to your life expectancy. Insurance actuaries -- statisticians who calculate insurance risks -- compile detailed life expectancy tables using mortality data for various populations. Actuaries then determine for each group the insurance rates that produce the profit desired by the insurer. How actuaries arrive at their conclusions has been a subject of concern, and some population groups have questioned the fairness of the rate determination. Since 2009, all U.S. insurers are required to use a standardized mortality table issued and periodically updated by the National Association of Insurance Commissioners.
The NAIC Model Rule
The National Association of Insurance Commissioners Model Rule describes mortality tables that U.S. insurers must use when determining most life insurance rates. This document describes the expected mortalities of all U.S. populations. It has separate tables for males and females and takes into account the improving mortalities over time of U.S. population groups. As you age, your life expectancy decreases, which means that your cost of acquiring life insurance increases each year. But because over the long term U.S. mortality rates improve, your rate of increase declines each year.
Life Expectancy Table Details
While life expectancy tables, including the NAIC Model Rule, show increased risk of mortality with increasing age, not everyone at a given age receives the same premium quote. Women, for example, live longer than men. The premium for a 60-year-old female will be lower than that for a male of the same age. Insurance companies are also allowed to factor in other perceived risks: If your family history indicates an increased risk of cancer, for example, the life expectancy tables will indicate that you represent an increased mortality risk, and you will likely pay more for your insurance than an otherwise similar person whose family history indicates no such risk. Other risk factors are also included in life expectancy tables: Important among them are your socio-economic status, whether or not you have a history of smoking, obesity or drug abuse and many pre-existing health conditions.
Other Risk Factors
Hazardous jobs and lifestyle choices are increased risk factors that are taken into account by life expectancy tables. A million-dollar policy on an oil-rig worker, for example, is estimated to be about $5,000 more annually than one for a white-collar worker of the same age and gender. Flying a plane, auto racing and other sports that life expectancy tables determine represent increased mortality risks also result in higher premiums. By tacit agreement, however, most insurance companies do not use tables indicating increased mortality rates for firefighters and police.
Forbidden Risk Factors
While insurers are allowed to charge more for life insurance when the applicant's choices represent greater mortality risk, they are forbidden by law to charge more for risks associated with race or other inherent characteristics. The life expectancy tables for scuba divers, for example, indicate increased risk, and therefore insurers quote higher premiums to those who pursue scuba diving as a hobby. But insurers are no longer allowed to quote African Americans higher premiums on the basis of race, even though the life expectancy tables reveal a continued higher mortality risk. Dissatisfaction over racial discrimination in life insurance rates, in fact, was one of the factors that led to the establishment of national mortality standards.
- Social Security Administration: Calculators -- Life Expectancy
- National Association of Insurance Commissioners: NAIC Model Rule (Regulation) for Recognizing a New Annuity Mortality Table for Use in Determining Reserve Liabilities for Annuities
- Northwestern Journal of Law & Social Policy: Ending Jim Crow Life Insurance Rates
- MoneyMatters: Mortality Tables and Life Insurance -- An Overview
- Hinerman Group: Browse: Home / insurance / Police and Firemen Catch a Life Insurance Break!
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.