Life expectancy is a statistical estimate of the average number of years a person is expected to live based on actuarial data. Understanding life expectancy can help in many financial areas, from insurance to retirement planning.
Key Insights
- Life expectancy predicts the average lifespan based on various health and demographic factors.
- It influences life insurance pricing and underwriting processes.
- Purchasing life insurance at a younger age typically results in lower premiums due to a higher life expectancy.
- Life expectancy assessments are crucial for retirement withdrawals and annuity payouts.
The Role of Life Expectancy in Financial Decisions
Life expectancy metrics are essential for calculating life insurance premiums and minimizing risk. Actuarial tables, often provided by government agencies, help insurers estimate a person’s risk of mortality.
Several factors influence your life expectancy, including:
- Birth date
- Gender
- Race
- Health status
- Family medical history
- Lifestyle choices such as smoking
The federal government’s data on U.S. life expectancy can be found at the National Center for Health Statistics website and the Social Security Administration’s Actuarial Period Life Table. Remember, life expectancy evolves; as you age, expectancies are adjusted to omit those who have already passed away.
Human life expectancy has generally increased over centuries, although recent events like the COVID-19 pandemic caused a dip. In 2021, the average life expectancy in the United States was recorded at 76.1 years.
Life Expectancy and Insurance Costs
Life expectancy is the main aspect insurers consider when pricing life insurance policies. Lower risk of early death results in cheaper premiums. Thus, buying insurance young is generally more cost-effective. Delaying insurance purchases results in higher premiums due to lower life expectancy.
Investing in a life insurance policy early can save money and, for permanent policies, accumulate cash value over time.
Planning for Retirement and Annuities
When planning for retirement, estimating life expectancy helps allocate retirement savings smartly. Many couples calculate joint life expectancy to ensure financial security for each partner.
- Joint life expectancy involves considering both partners’ ages to determine retirement and pension plans.
Life expectancy metrics specifically influence:
- Required Minimum Distributions (RMDs), which are withdrawals mandated by the IRS at certain ages.
- Annuity contracts that dictate periodic payments based on expected lifespan.
The raise in RMD age from 72 to 73 (starting in 2023) reflects increased average lifespan, suggesting further legislative adjustments could happen in response to changing global life expectancy trends.
Real-Life Example: US Life Expectancy Averages
As of 2021, U.S. women had an average life expectancy of 79.1 years, while men had a 73.2-year expectancy. These figures were negatively influenced by the COVID-19 pandemic, among other factors.
How Do Insurers Use Life Expectancy?
Insurers use mortality tables that predict lifespan based on averages for similar aged and health-status groups, thereby estimating payout timeframes accurately.
Life Expectancy and Taxes
In retirement, the IRS uses actuarial tables to estimate remaining life expectancy, which informs RMD calculations. Failure to meet RMD requirements results in steep penalties.
Impact on Life Insurance Premiums
Age and health top the list of factors influencing life insurance premiums, where higher life expectancy generally offers lower premiums.
Financial Decisions and Life Expectancy
Life expectancy remains a foundational element of many financial strategies. Whether figuring out how much to save for retirement, when to purchase insurance, or how to gauge your financial gifts, keeping life expectancy in mind can help optimize decisions for enduring financial health.
Related Terms: actuarial tables, insurance premiums, annuities, required minimum distributions, IRS life expectancy tables.
References
- New York State. “The Cost of Life Insurance”.
- Centers for Disease Control. “Life Expectancy in the US Dropped for the Second Year in a Row in 2021”.
- Protective. “The Cost of Waiting.”
- Internal Revenue Service. “Publication 590-B (2022), Distributions from Individual Retirement Arrangements (IRAs).” Appendix B.
- Internal Revenue Service. “H.R.2617 - Consolidated Appropriations Act, 2023”.
- Internal Revenue Service. “Retirement Topics-Required Minimum Distributions (RMDs)”.
- Internal Revenue Service. “Retirement Plan and IRA Required Minimum Distributions FAQs”.
- Internal Revenue Service. “Retirement Plan and IRA Required Minimum Distributions FAQs.”
- Texas Department of Insurance. “Life Insurance Guide”.
