Mortality tables – also known as actuarial tables – are used by life insurance companies to calculate premiums for individuals who wish to purchase life insurance. Typically, these tables take into consideration the number of years a person of a particular age and gender can reasonably be expected to survive from the date they apply to take out life insurance. The premiums for the policy will be based on these predictions.
The mortality table is a complex mathematical calculation which is used as a starting point for fixing life insurance premiums at any given age. It’s an important tool for insurance companies, as it is used to calculate risk and determine the level of insurance premiums. In essence, a mortality table determines the probability of death from birth to the age of 120. Basic mortality tables cover both sexes and all races, but the tables can be extended to provide extra information, such as the impact that risk factors such as smoking may have on life expectancy.
Based on figures from the latest mortality table, a newborn boy can be expected to live until almost 77 years, barring accidents, while a newborn girl can more or less guarantee celebrating her 80th birthday. However, if the boy makes it to 77, he has a life expectancy of a further 9 years, while the girl who has a party on reaching the age of 80 could still be around for her 90th birthday, all things being equal.*
The premium calculation is only part of the story, though. In law, life insurance companies must be able to pay out all claims. This means funds must be held in reserve in anticipation of future claims. Mortality tables enable the insurance companies to assess risk and set aside enough funds to meet expected claims. This is a complicated financial calculation which is based on the latest official mortality tables.
If a new mortality table comes into effect before you apply to take out life insurance, it may not have an immediate affect on your premiums. Each new version of the mortality table increases life expectancy, which is a logical progression, given the improvements in diet, technology and medical expertise. Eventually, this will lead to reduced premiums, but it may not happen overnight.
In America, the law requires insurers to adopt the latest mortality tables as their benchmark for calculating risk, but they are allowed up to five years grace until they must work from the latest tables.* Some insurance companies will choose to work from the new tables as soon as they are approved, while others may decide to carry on working with the old tables for as long as possible. Then there will be those companies who fall between the two extremes.
If you are considering taking out life insurance, you may be able to have some influence on your premiums and level of cover. Ask your insurance company which version of the mortality tables they are working from. If it’s not the latest version, shop around until you find a company who can give you a better deal. At the same time, keep in mind that, if you have dependents such as a wife and children, it’s better to pay more for your life cover than to risk dying with no insurance cover at all. Nobody knows what lies ahead, after all.