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How mortality tables drive life insurance

Mortality numbers underpin life insurance rates

What are mortality tables?  They sound pretty ominous but their trends have helped to bring down term life insurance rates over the past decade so it's probably important to get down to the bottom of what they are.  A quick look at the world of mortality tables.

How do life insurance carriers figure out the rates?  Let's say a 40 year old wants $500K for 10 years.  If the carrier doesn't apply the correct rate for this specific situation, they will not be in the business long.  If they under-price the term life insurance rate, claims can overwhelm their received premium for the entire risk pool and even undermine their reserves.  If they overprice this rate, they will not be competitive on the market which means they will have a smaller risk pool.  It's more important to have an extra 100,000 people in the risk pool that it is to make another $5-10 monthly off a subscriber.  Too small of a risk pool can increase the risk that an aberrant claims year can also adversely affect the carrier's financial strength.  A life carrier's margin of error is very slim on such a commodity product such as term life insurance policies so they really have to be pretty exact in their pricing.

So how do the life carriers attempt this calculation?  The answer lies in mortality tables.  It's a fancy word for the recorded history of death according to various demographic information such as age, gender, area, and well....as many variables as they can possible get their hands on.  Just having age and gender is not really a complete picture.  The rate of death per 100,000 (which is typically how these are view); age 40-45 is 161.6 for California in the year 2005 according to the CDC.  That means in 2005, 161 people dies in that demographic group per 100,000.  Contrast this with Louisiana for the same period, age, etc.  That number is 306.7!  That's almost double.  Apparently, it's much more unhealthy to live in Louisiana than in California.  These mortality tables are a foundation for helping the carriers understand the risk.  They partially use available date such as those provided by the government and also internal data based on their claims experience.  If they see their claims reflect a variance from the the established mortality data, they will adjust if it's more than just a blip.  So mortality tables plus claims experience drive term life insurance premiums

Up till this point, it's been easy and no carrier should have any real advantage over another one when pricing their term life plans.  It gets trickier and it's not all black and white.  There are shades of grey and this deals with the subtleties of arise from a given person's health class and history.  How much weight does elevated cholesterol carry?  What about height and weight?  How are the mortality tables affected by a family history of cancer or some other disease?  This is where things get a little harder.  The carriers can try to multiply the base mortality rates for one given disease but what about multiple issues or attributes.  At some point, it might get so serious due to a combination of health issues to where the carrier will decline coverage but there's a lot of room between perfect health and outright declination. 

The carrier must somehow price these variables into the rate and the mortality tables only provide a foundation to begin from.  It's a solid foundation and it's good to know how the companies come up with the term life rates you see in your quote.


 

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