The Life Insurance Risk Pool- Part III
What is the basis of life insurance really grounded upon? What decides whether a company is charging competitive premiums for their products? Although the answers to these questions are very complex, one common collection of data is used to develop the majority of the reasons behind premiums in relation to the death benefit offered, namely, mortality tables.
In Parts 1 and Part 2 of the Life Insurance Risk Pool we learned about risk, pooling, and the law of large numbers. Let us now turn to their foundation through a better understanding of mortality tables.
Every life insurance product must incorporate three key factors in its construction and operation: mortality, interest, and expense. Assumptions are made over the course of time using these three factors to determine policy premiums and structures. The results create experience, which will help determine the solvency and profitability of the company. The part that mortality rates play in this is to project the cost of insurance to cover death claims.
In 2001, the Commissioners Standard Ordinary (CSO) Mortality Tables replaced the 1980 CSO tables. The most significant change was the extension of life mortality to age 120, thereby replacing the age 100 life mortality under the 1980 tables. These table seem to change about every 20 years or so.
Life insurance companies pool their information to create mortality tables that can accurately indicate the number of insured persons in a specific large group (i.e. males, females, smokers, non-smokers etc.) that will die at a particular age. Some carriers may use composite rates which are often generated by methods empirically combining multiple domains of surgical mortality and hospital volume statistics to arrive at life expectancy projections.
Life expectancy is a key element of mortality tables. Life expectancy rates on the 2001 tables are greater than those on the 1980 tables because mortality rates are now lower. In comparison to the 1980 tables, life expectancy for a male is now 75.67 years rather than 70.83 years from the 1980 tables, and women are now 79.87 instead of 75.83. These expectancies increase as people get older. For example, according to the 2001 CSO table, a male reaching age 60 now has a life expectancy of 79.75 years, by age 80 his expectancy is 86.76 years, and by age 90 it is 93.2 years.
Life expectancy is a combination of age and longevity, and longevity decreases more slowly as age increases. This is one of the main reasons why the cost of life insurance goes up as people get older and they find themselves usually paying higher premiums. Let this be a lesson not to wait to get life insurance, the longer we drag our feet the more expensive it may become. Today is the youngest we will ever be…..”He who hesitates is lost.”
About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at 1-800-651-1953 or KMcDonald@Pivot.com.