Life Expectancy: It’s More Than Just A Number [The Cost of Life Insurance]

September 27, 2021

— Sept. 27, 2021 —
Published in LIFE INSURANCE | DEFINITIONS
on investopedia.com
by Katie Adams

Life expectancy is the single most influential factor that insurance companies use to determine life insurance premiums. Understanding how insurance companies use the concept of life expectancy —and how it is calculated for the insured — can help you decide when to purchase a policy, how to calculate the future potential value of your policy, and what to consider when choosing an annuity payout option.

There are several factors that affect your life expectancy; the two single most important being when you were born and your gender. Additional factors that can influence your life expectancy are:

Your race
Personal medical conditions
Family medical history

Life Expectancy and Your Life Insurance Premium

There is a direct correlation between your life expectancy and how much you will be charged for a life insurance policy. The younger you are when you purchase a life insurance policy, the longer you are likely to live. That means that there is a lower risk to the life insurance company because you are less likely to die in the near term, which would require a payout of the full benefit of your policy before you have paid much into the policy.

Conversely, the longer you wait to purchase life insurance, the lower your life expectancy, and that translates into a higher risk for the life insurance company. Companies compensate for that risk by charging a higher premium.

Therefore, many people wonder if they should purchase life insurance for their children. After all, having a policy as a child ensures the lowest possible premium. However, there is a cost-benefit analysis to consider before purchasing a policy for your child. Because the main financial benefit of life insurance is to provide income to dependents in the event of the policyholder’s death, life insurance coverage is relatively unnecessary for a child.

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