With the price of just about everything from gas to milk heading into the stratosphere, here’s a piece of good news for consumers: According to the Insurance Information Institute, the average cost of Term Life insurance has dropped. A big reason for the decline in premium rates is that life expectancies have increased because of improvements in health care.
Why does how long you live affect how much you pay for insurance? The answer to that question lies in the way insurance companies fund the death benefit they ultimately pay.
Insurers charge premiums, which they invest to create the money they need to pay benefits. The longer you live, the more time the money has to earn interest. This means insurers don’t need to charge as much to pay the same benefit. However, insurers can’t predict life expectancy for each individual policy owner. Instead, they use what is known as “the law of large numbers,” which accurately predicts how many deaths will occur within a group of policy owners. This mathematical principle says that the larger the group, the more predictable the future losses in the group will be for a given period of time.
Insurance companies employ mathematicians, called actuaries, who study this statistical data. The data is the basis for mortality tables, which show, for a person at each age, the probability that they will die before their next birthday. Mortality tables also show:
- The probability of surviving at any age
- The number of years people at different ages can still be expected to live
- The percentage of people in a particular age group who are still alive
- An age group’s longevity characteristics
Separate mortality tables are used for men and women because of their substantially different life expectancies. Other characteristics also can influence life expectancy, such as a person’s smoker status, occupation and socio-economic class.
The mortality tables insurers had been using were last updated in 1980 when the maximum life expectancy was set at 100 years. However, in 2001, the Society of Actuaries and the American Academy of Actuaries updated the mortality tables and changed life expectancy to 120 years.
How much insurance rates will continue to drop as a result of these changes is anyone’s guess. As mentioned above, Term Life insurance, which provides coverage for a specific period of time but doesn’t build any cash value, has been the most significantly impacted by these new mortality tables. Although Term Life might not have an investment feature, the death benefit it provides can be used to secure the financial future of the policy owner’s loved ones.
On the other hand, there are some industry experts who think that Whole-Life insurance will experience a substantial drop in rates. Unlike Term insurance, Whole Life provides a death benefit while building up cash value through the life of the policy.
A periodic review of your insurance coverage with one of our representatives is always a good idea. With changes in Life insurance premiums, pay particular attention to this at your next coverage review.