Life Expectancy

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Definition:

Life expectancy is defined as the average period that a person may live. It is the number of years that a given person is expected to live.

Description:

Healthier a person is, life expectancy is more.

The average number of years an individual can expect to live is called life expectancy. The life expectancy projects the age-specific death rates of the population for a given period of time over the entire lifetime of the population born during that time. The measure differs by sex, age, race and geographic location.

In insurance, knowing the life expectancy is an important factor when the insurer has to determine the premium. With life expectancy, the insurer has an idea of the probable amount of loss that will occur and the amount of payment the insurer will have to make.

Life expectancy makes the insurer aware of the average age of the death of the population. Later, the insurer can decide the payout for the period insured is going to live.

The premium as well as the returns under different life insurance policies is based on life expectancy. Apart from the insurer, life expectancy also indicates to the insured about the amount of money they will have to save for their retirement or for children.

Example:

Rohit (aged 19)and Santosh (aged 45 and a smoker) wanted to buy a term plan. The premium under the term plan for Rohit is less as he was young and his life expectancy was higher. On the other hand, premium for Santosh was higher as his life expectancy was comparatively lesser. Life expectancy gives the insurer a hope that the business they accept will be profitable.

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