What Is Life Expectancy?

What Is Life Expectancy?

Let me explain life expectancy to you directly: it's a statistical estimate of the average number of years you're expected to live, drawn from actuarial data. You'll see it applied in various financial areas, like life insurance, pension planning, and even U.S. Social Security benefits. In most places, these calculations come from national statistical agencies that crunch massive datasets to derive actuarial ages.

Key Takeaways

Here's what you need to grasp: life expectancy predicts how long you'll live based on statistics. It incorporates individual and population factors through actuarial science to produce that number. Insurers use it for pricing and underwriting life insurance policies. If you get life insurance young, it costs less because your higher life expectancy means less risk for the insurer in paying out the death benefit soon. It also dictates withdrawal rules for retirement plans and payments for annuities or pensions.

Understanding Life Expectancy

I want you to understand that life expectancy is the top factor insurance companies rely on for setting life insurance premiums. They pull from actuarial tables, like those from the Internal Revenue Service, to minimize their risk exposure. Several elements affect your life expectancy, or actuarial age. The biggest ones are your birth year and gender. Other influences include your race, personal health, family medical history, and choices like smoking or other risky behaviors.

You can check U.S. government data on life expectancy at the National Center for Health Statistics website or the Social Security Administration's Actuarial Period Life Table. Remember, life expectancy isn't static—it shifts as you age. Actuaries use formulas that account for people younger than you who've already died, so as you get older past mid-life, your expectancy actually rises. In simple terms, the older you get beyond a point, the longer you're likely to live.

Globally, human life expectancy has surged over the last two centuries, especially in developing nations, though it dipped in the early 2020s due to the COVID-19 pandemic. For 2021, the U.S. average was 76.1 years.

Life Expectancy and Life Insurance

Life expectancy is the main risk indicator for insurers when assessing if a policyholder will die and trigger a death benefit claim. They look at your age, lifestyle, personal and family health history, and more to set premium rates.

There's a straightforward link between your life expectancy and your insurance costs. Buy young, and your longer expected life means lower risk for the company—they're less likely to pay out soon before you've paid in much. That keeps premiums down. Wait longer, and your shorter expectancy raises their risk, so they charge more.

The takeaway here is clear: get life insurance for yourself and your spouse early. You'll cut premium costs, and if it's a permanent policy with cash value, it has more time to grow savings.

Retirement and Annuity Planning

In retirement planning, life expectancy is essential. Many people base their asset allocations on how long they think they'll live, using personal estimates rather than just stats.

For couples, joint life expectancy comes into play, factoring in both partners since one might inherit the funds. The IRS offers tables for calculating this.

Most retirement plans, like traditional, Roth, SEP, and SIMPLE IRAs, use life expectancy for required minimum distributions (RMDs). You generally start taking RMDs at age 72 (or 73 from 2023). These are based on IRS tables, though some plans allow delays.

Note that due to rising life expectancies, Congress raised the RMD age from 70½ to 72 in 2019, and to 73 starting in 2023.

Life expectancy matters in annuities too. The insurer pays you a set amount for a period or until death. When setting this up, consider how long you'll live—if you choose a fixed period and outlive it, payments stop. Options include single-life annuities that pay as long as you're alive, or joint-life for you and your spouse.

What Is the Average Life Expectancy in the U.S.?

As of 2021, U.S. women have an average life expectancy at birth of 79.1 years, per the Centers for Disease Control. For men, it's 73.2 years. This is down from previous years, thanks to drug overdoses, accidents, and COVID-19. Overall, it's 76.1 years.

How Does Life Expectancy Factor into Insurance?

Insurers use mortality tables to estimate policyholders' life expectancies based on age and health averages, helping predict claim payouts.

How Does Life Expectancy Factor into Taxes?

In retirement, the IRS applies actuarial tables to estimate your remaining years, which sets your RMDs from tax-advantaged accounts starting at age 73. Miss the full withdrawal, and you face a 50% excise tax on the shortfall.

How Does Life Expectancy Affect Premiums?

Age is the key determinant for life insurance rates, followed by health. Younger ages mean higher expectancy and lower rates.

The Bottom Line

Life expectancy tells you how much longer someone your age is likely to live on average. It shapes major financial choices, from retirement savings amounts to insurance timing and costs. Factor it in when making these decisions.