Understanding Valuation Mortality Tables: A Key to Insurance Success
A valuation mortality table is a statistical tool utilized by insurance companies to calculate statutory reserves and cash surrender values for life insurance policies. This table shows the death rate at any given age, derived from historical data on the number of deaths per thousand individuals. It helps insurers assess risks and set appropriate premiums.
Key Takeaways
- A valuation mortality table calculates death rates for various ages.
- Insurance companies use these tables to maintain reserves for claims and benefits.
- These tables include safety margins to prevent insurers from financial insolvency.
- Complex algorithms—considering factors like age and family health history—determine actuarial age.
The Importance of Valuation Mortality Tables
Life insurance providers use valuation mortality tables to determine their legal reserve requirements, which are the liquid assets legally required for claims and benefits payouts. These reserves must align with guidelines set by the National Association of Insurance Commissioners (NAIC), ensuring that insurance companies remain solvent.
Valuation mortality tables often incorporate safety margins to cushion insurers against unforeseen increases in death rates. Insurers may add their own extra margins for additional security. This buffer is crucial to avoid insolvency from an unexpected spike in claims.
How Mortality Tables Work
Under Section 7520 of the Internal Revenue Code, insurers require actuarial tables for valuing annuities, life estates, remainders, and reversions. The Commissioners Standard Ordinary (CSO) mortality table is the standard for calculating life insurance ages across the U.S. This ensures consistent longevity predictions, helping insurers set accurate premiums and payouts.
These tables were last updated significantly in 2017, reflecting longer life expectancies among Americans. By 2020, all insurers had transitioned to the 2017 CSO table for new products.
Example of Valuation Mortality Table
Imagine a 40-year-old male non-smoker seeking a $100,000 life insurance policy. The insurer determines, using mortality tables, that this individual is likely to live to age 81. Therefore, the insurer expects to receive 41 years of premium payments before paying the death benefit. Variations in actual lifespan won’t concern the insurer drastically because they deal in large volumes and average out individual deviations.
Actuaries use sophisticated algorithms considering various factors like high blood pressure, cholesterol, and family history, influencing the overall risk assessment. Generally, age, gender, tobacco use, and current health are the primary factors affecting life expectancy.
The longer your expected lifespan, the less you’ll pay for life insurance because the insurer anticipates more premium payments over time. Conversely, shorter life expectancy leads to higher premiums.
Benefits of Knowing Your Actuarial Age
Consumers can utilize online calculators to get a rough estimate of their actuarial age. This can help predict how insurers will price your policy, aiding in financial planning and decisions on when to start receiving benefits like Social Security. Knowing your actuarial age can help you estimate the income you’ll need during retirement.
Frequency of Mortality Table Updates
The IRS usually updates its actuarial tables every decade, with the current table based on 2010 data and effective as of May 2023. The NAIC and Society of Actuaries update their tables less frequently; the most recent transition was from 2001 to 2017 CSO tables.
Understanding Mortality Rates
In 2021, the U.S. mortality rate was 835.4 deaths per 100,000 people, with an average life expectancy of 76.1 years. However, mortality rates change with age; for example, a 65-year-old had a life expectancy of 83.4 years in 2021.
The Bottom Line
Valuation mortality tables are vital for insurers as they quantify the likelihood of death at various ages, assisting in designing and pricing insurance products. Understanding these tables can also benefit individuals in their financial and retirement planning.
Related Terms: statutory reserve, actuarial life expectancy, insurance premiums, Commissioners Standard Ordinary table.
References
- National Association of Insurance Commissioners.“Valuation Manual: Jan. 1, 2023 Edition.”
- Journal of Insurance Medicine. “The History of Actuarial Mortality Tables in the United States.” Page 2.
- Internal Revenue Service. “Actuarial Tables”.
- Society of Actuaries. “Report on the 2017 CSO and 2017 CSO Preferred Structure Table Development”, Pages 1, 3.
- Society of Actuaries. “2017 Commissioners Standard Ordinary (CSO) Tables”.
- AIG. “2017 CSO Transition: Update and Guidelines.”
- Internal Revenue Service. “Actuarial Valuations.”
- CDC. “Mortality in the United States, 2021”.
