When individuals elect to take out life insurance there is no standard premium for everyone. The most crucial factor which insurance companies use to determine risk and thus set premiums is the expected mortality of the insured person. This enables the companies to assess the expected contributions over time, against the comparative life span of the insured. The most important analytical tools which life insurance companies use are mortality tables.
Mortality tables are compiled by actuaries who base their data on the characteristics and ages of certain group or generational populations. They chart the incidence of death by age, using statistics derived from populations. At their basic level mortality tables comprise figures which show the life expectancy of groups from the age of birth upwards. Naturally individuals have certain characteristics which will affect their life expectancy so they do not fall within generalized data. Mortality tables need to be updated when to take account of changing trends.
In 2009 it became a legal requirement for life insurers to replace the previous 1980 standard mortality table with the 2001 Commissions Standard Ordinary Mortality Table. This is the official mortality table used by the National Association of Insurance Commissioners. When the 2001 table came into effect it amended the life expectancy figures by increasing them from 100 years, to an assumed life expectancy of 120 years. Insure.com provides the official standard mortality table here.
Expected mortality rates are usually defined firstly by gender, as women tend to have an increased life expectancy. Life insurance companies then factor in other characteristics to set their own rates based on perceived risk. Factors such as family history, socio-economic status, smoking status, pre-existent health conditions and obesity are analysed through mortality tables to formulate a more individual life expectancy rate.
Age is a vital key as a younger person naturally has a longer life expectancy and will be able to contribute more premiums over time. An older person has a shorter life expectancy thus if they elect to take a life insurance policy later in life will have their premiums weighted accordingly.
Insurance companies can protect themselves from risk by using actuarial drawn mortality tables. They are also obliged by law to ensure that their reserves are sufficient to pay out on any life insurance claims and to cover growth if the insured person chooses to cash in the policy as a savings vehicle.
By understanding the basics of how insurance companies set premiums based on mortality tables it is possible for individuals to request which factors are incorporated into the actuarial tables used. Discussing individual risk with several insurers may well result in finding a company which uses a model more closely aligned to the person being insured and thus influence premiums.