In the life insurance business, the cost of a policy depends largely on the probable length of your remaining life. To figure out how long you might be expected to live, life insurance companies depend on mortality tables. With a glance at a mortality table, a life insurance actuary calculates your premium.
Mortality tables are also known as morbidity tables or life tables. They give the rate of death among a defined population. For example, a mortality table published by the Social Security Administration in 2007 found that among males 45 years old, the chance of death in a given year was .0003543, or 3.543 in 10,000. A mortality table may also give the life expectancy of the same population, which was 33.33 years, in the same example.
Variables and Risk Factors
The life insurance industry depends on detailed mortality tables that break out the statistics using variables. Useful variables include gender, race, income level and family medical history -- for example, the instance of cancer or heart disease among your parents or immediate family members. Insurance companies also need to know about risk factors, such as whether you smoke, use illicit drugs or participate in dangerous sports, all of which affect your life expectancy.
Life insurance companies don't have the resources to compile mortality statistics on their own. Instead, they use the statistical tables published by agencies such as the U.S. Department of Health and Human Services or the National Vital Statistics System, a division of the Centers for Disease Control and Prevention. Other federal agencies, such as the Social Security Administration and the Internal Revenue Service, also publish and use their own mortality tables. An actuary employed by the insurance company applies mortality statistics to life insurance products, setting premium rates according to the risk of your death and your life expectancy.
Premiums and Life Expectancy
A life insurance contract is an agreement to pay your beneficiaries on your death. Using a mortality table, the insurance company arrives at an estimate of your remaining years of life. The goal of the company is to collect more in premiums than it has to pay out when you die. For that reason, premiums rise significantly for people who are older. Some life insurance contracts promise to lock in premium amounts for a specified period. These "level term" policies offer lower rates to younger people willing to make a longer commitment.
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