I knew a guy who made cabinets for a living. He bid jobs through local contractors and directly to homeowners and I could never figure out how he arrived at the prices he presented. There didn’t seem to be a lot of equity between one quote and the next.
Now I know there are differences in materials and I suppose mileage to and from the job site might play into it, but well, it just didn’t add up, so I asked. He explained to me that the calculation was very simple. He could figure the materials right down to the nearest dollar with very little waste. He then added that figure to how much he felt he needed to live on during the period that it would take him to complete the job. If the job was calculated when he had a vacation coming up it tended to be higher than at other times. Very scientific!
Not sure what made me think about that. In life insurance the cost of the job is determined by the health of the applicant and a mortality table, a table that gives the average life expectancy of a person at any given age. Of course in the final price are things like reserve requirements, factors for whether it is paid annually or monthly and, who knows, maybe how much the president of the company feels he will need from each policy sold to live through the next month.
The health of the applicant is a big swing factor since obviously there are those health issues that have an impact on mortality. While we all know people who have lived to better than average mortality experiences while smoking, statistics would show that life expectancy for smokers is shorter than non smokers.
By manipulating the different factors such as family history, driving and drinking habits and whether you have or are treated for high blood pressure, you can see for instance how a 35 year old male who smokes, drinks more than 3 drinks once a week, has 3 or more traffic violations in the past 3 years, has a family history of heart disease and is treated for hypertension, has a life expectancy of 62.3 years.
Compare that with a 35 year old male non smoker, who doesn’t drink and drives very prudently, has a good family history and no problems with blood pressure with a life expectancy of 79.5 years. Even if all of the other factors are in his favor, just smoking reduces mortality by 7 years.
And that is just the surface of a very complex practice known as underwriting. When you consider that obesity is the leading risk factor for diabetes which is a leading risk factor for heart disease, and that each of those health issues has possible collateral health issues, well, sometimes I find it amazing that we can get good, affordable rates for someone who is overweight.
Bottom line. When you apply for life insurance the underwriter has to go figure. While they use mortality tables, they also follow guidelines that have a lot to do with company philosophy. Unless you are perfectly healthy and don’t have any risk factors, the underwriter will have to mix it all together and determine what part of the risk pool you should be paying for.