I’ve often talked about mortality risk being the basis for life insurance underwriting, but looking back I’ve never really explained what that means in the context of a “normal” lifespan.
We all hear that Americans are living longer than ever, one of the big problems we are facing as a nation. Not only are the expenses related to social security going on a lot longer, but medical care costs for those in the final stages of life have skyrocketed due to technology and in a lot of cases a lack of planning.
But let’s just start with a simple statement about mortality or longevity. On average in the US we live to be about 78. My Dad lived to age 86 and my Mom is nearing her 87th birthday, so that is certainly not to say that it is rare for people to live beyond the average age. We all know of people who have lived to their 90’s and if my memory serves me right (which it rarely does at age 57), I believe someone lived to 113 in the US recently.
But that is also to point out that there are a lot of people who won’t ever see 78. We all know of families that have had children die, if not during childbirth, shortly after and we all know of juveniles who have died in accidents and from diseases that are just far too brutal such as cancer. All of us know of someone who has died in their teens, 20’s, 30’s or 40’s, far too young, and when you get to my age you really start noticing all the people my age that are dying.
So when an underwriter looks at an application, especially an impaired risk case, where there is an extensive family history of heart disease or cancer, or someone is suffering from epilepsy or type 1 or type 2 diabetes they start from a base. The base for life insurance is the average person who has average health issues, an average build and an average family history. That is a standard rate. There is a misconception that average gets preferred plus rates. Preferred plus is a couple of notches above average, the person that barring the unforeseen will have what it takes to be a centenarian.
So if standard really applies to those people who on average will live to age 78, underwriters have to take into account, for instance, how type 1 diabetes will impact that forecast and more importantly how well controlled type 1 versus a poorly controlled type 1 will impact that assumption. On average a person with juvenile onset type 1 diabetes will live 7 years less than the average life expectancy, 71 years. That is not to say that a person who leads a healthy lifestyle and is very proactive in treating their diabetes won’t live to 90 or 100, but it’s also well known that children often die from diabetes without a diagnosis and many who can’t control the ravages of the disease only live to their 20’s and 30’s.
Bottom line. While there may be some rubber stamp underwriting going on in the life insurance world, you can see that the job of a good impaired risk underwriter is not a simple one.