With the price of just about everything from gas to milk heading into the stratosphere, here’s some 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. I haven’t heard anyone complain about lower life insurance rates.
Why does how long you live affect how much you pay for insurance? The answer to that question lies in how insurance companies fund the death benefit they pay.
Insurers charge premiums, which they invest in creating the money they need to pay benefits. The longer you live, the more time the money has to earn interest. That means insurers don’t need to charge as much to pay the same benefit. However, insurers can’t predict the life expectancy of each 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.
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 of different ages can still be expected to live,
· The percentage of people in a particular age group who are still alive; and
· An age group’s longevity characteristics.
The Bean Counters are in Control
Separate mortality tables are used for men and women because of their different life expectancies. Other characteristics can also influence life expectancies, such as smoker status, occupation, and socioeconomic class.
The mortality tables insurers used were last updated in 1980 when the maximum life expectancy was 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 due to these changes is anyone’s guess. As mentioned above, these new mortality tables have the most significantly impacted term life insurance, providing coverage for a specific period but not building any cash value. While term life may not have an investment feature, its death benefit can be used to secure the financial future of the policy owner’s loved ones.
On the other hand, some industry experts think that whole-life insurance will experience a substantial drop in rates. Unlike term insurance, whole life provides a death benefit while building up a cash value through the policy’s life.
A periodic review of your insurance coverage is always a good idea. With changes in life insurance premiums, pay particular attention to this in your following coverage review.
Give Brian a call today at 352-508-4221 for a free quote.