What is a Valuation Mortality Table?
I'm going to explain what a valuation mortality table is—it's a statistical chart that insurance companies use to calculate the statutory reserve and cash surrender values for life insurance policies.
You should know that a mortality table displays the death rate at any given age, based on the number of deaths per thousand people of that age. It gives statistics on the likelihood that someone of a certain age will live a specific number of years. This helps insurance companies assess risks for individual policies and their entire insured group. They then use this data to determine premiums, which directly affects how much you pay for life insurance.
Key Takeaways
- A valuation mortality table is a statistical chart used by insurance companies to calculate death rates for people at different ages.
- Insurance companies use this table to set reserves for claims, benefits, and cash surrender value of life insurance policies.
- The tables integrate a monetary cushion to protect insurers from going bankrupt.
- Algorithms to calculate actuarial age use a complex mix of factors, including age and family health history.
Understanding Valuation Mortality Table
Life insurance companies rely on valuation mortality tables to figure out their legal reserve—the amount of liquid assets they must set aside by law for claims and benefits. These statutory reserves are something companies have to factor in when designing new products and setting premiums. The National Association of Insurance Commissioners (NAIC) establishes minimum reserve requirements for insurance products and updates them periodically.
A valuation mortality table usually includes a safety margin in the mortality rates to safeguard the insurers. Regulators often mandate these safety margins for carriers. Many carriers add their own extra margins on top of the regulatory ones. These margins apply differently to insurance policies and annuities.
Insurers use this safety margin to create a buffer if more people die than anticipated, resulting in more claims to pay out. Without reserves, an insurance company could face bankruptcy from too many claims.
How Mortality Tables Work
Section 7520 of the Internal Revenue Code requires using specific actuarial tables for valuing annuities, life estates, remainders, and reversions under Title 26 of the U.S. Code. You can find these tables on the IRS website. The Commissioners Standard Ordinary (CSO) mortality table, developed by the NAIC with the Society of Actuaries (SOA), is used to calculate life insurance ages in all 50 states and the District of Columbia.
Mortality tables help insurers determine your actuarial life expectancy. This is an average statistic—it might be more or less than how long you actually live. But when applied to millions of people, these tables are highly accurate in predicting death rates. Insurers use this to set premiums and payouts.
The CSO/SOA tables were last updated in 2017, incorporating much more data than the 2001 version. The new tables show lower mortality rates due to longer lifespans among Americans in recent years. By 2020, all insurance companies had to switch to the 2017 CSO table for new products.
What benefits would knowing my actuarial age provide? You can use online calculators to estimate your actuarial age roughly. This gives you an idea of how insurers will price your policy. It's also helpful for financial planning, like deciding when to start collecting Social Security. You can use it to predict how many years of income you'll need in retirement.
How often are mortality tables updated? The IRS updates its actuarial tables every 10 years. The current one, based on 2010 data, took effect in May 2023. However, NAIC and SOA update theirs less often, with the latest shift from 2001 to 2017 CSO tables for new products.
What is a normal mortality rate? In 2021, the U.S. mortality rate was 835.4 deaths per 100,000 people, meaning an average life expectancy of 76.1 years. But your expected mortality changes with age—for a 65-year-old in 2021, life expectancy was 83.4 years.
Example of Valuation Mortality Table
Let's say a 40-year-old male non-smoker wants a $100,000 life insurance policy. Using mortality tables, the insurer estimates he'll live to age 81 on average. That means they expect 41 years of premium payments before paying the death benefit. The premium is set based on this prediction and the future payout.
This person might die tomorrow or live to 100. One case doesn't impact the insurer much—they sell thousands of policies yearly, so the averages hold up across the large group.
This is a basic example of how actuaries assess longevity, but it's more complex. Actuaries use algorithms considering factors like high blood pressure, cholesterol, family history, and others. The main factors are age, gender, tobacco use, and current health.
The longer your expected longevity, the lower your life insurance costs. The insurer figures you'll live longer and pay more premiums total compared to someone with shorter expectancy.
The Bottom Line
Valuation mortality tables are tools insurance companies use to calculate values for designing and pricing products. Mortality rates show the chance of dying at a given age, based on factors like current health. While mainly for insurers, you can use this info for your own financial, insurance, and retirement planning.
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