Definition
A Mortality Table, also known as a life table, is a statistical chart used in finance, particularly insurance and pension plans. It shows the rate of mortality at each age or range of ages, typically expressed as the number of deaths per thousand population per year. This information is utilized by financial organizations to determine the likelihood of death within a certain age group, aiding in risk assessment and premium calculations.
Key Takeaways
- A Mortality Table, also known as a life table, is an actuarial tool used by insurance companies to understand the likelihood of death at each age. It serves as a fundamental element in determining premiums for life insurance policies.
- The table lists the probability of mortality at each age group and is typically divided by gender and sometimes sub-divided by smoking status and other factors that impact life expectancy. The table includes rates for both mortality (death) and survivorship (the likelihood of living).
- Mortality Tables are regularly updated to reflect changes in life expectancy due to advancements in healthcare, lifestyle changes, and public health. This means the information in these tables directly impacts the cost and availability of life insurance products for consumers.
Importance
A Mortality Table, also known as a life table, is a crucial tool in finance, particularly in the realms of insurance and annuities.
It is essential because it provides statistical information about the probability of death at each age for a defined population, thus enabling financial institutions to accurately manage risks and set up premium.
These tables are predominantly used by insurance companies to estimate their liabilities and set up policy pricing properly by predicting life expectancy.
Furthermore, in the context of pensions and retirement benefits, the mortality table helps calculate the potential payouts during an individual’s retirement years, further assisting in designing effective retirement plans.
Therefore, accurate mortality tables contribute to the financial stability of insurance firms, the insurance industry as a whole, and the financial planning of individuals.
Explanation
A Mortality Table, also known as a life table, death table or actuarial table, serves a pivotal purpose in the field of insurance and annuities by gauging the probabilities of mortality rates among specific age brackets. This tool is essential for risk assessment and is the backbone of the underwriting process that insurers rely on when determining policy premiums.
By quantifying the longevity risk, insurers can estimate the number of individuals within a population that will survive to any given age, based on the current mortality rates. In simpler terms, it allows companies to statistically predict how many years an individual of a certain age may have left to live, thus facilitating a firm grasp on policy pricing.
Beyond insurance, mortality tables are used in a wide range of financial and economic calculations. Pension plans, for instance, use mortality tables to estimate future liability payments, as benefits are typically extended until the death of each pensioner.
Even in public policy and health care sectors, these tables are critical in demonstrating patterns of mortality and guiding decisions related to social security, health services, and other demographics related concerns. Mortality tables, therefore, are integral tools used to analyze survival rates and consequently direct several financial, insurance, and public health interventions.
Examples of Mortality Table
Life Insurance: A life insurance company relies heavily on mortality tables to calculate the cost of life insurance policies. It will look at the age, gender, and sometimes the health history of the insurance applicant, then reference the mortality table to determine the likelihood of the person living for another certain number of years. This helps the company determine the premium they should set for the policy.
Pension Planning: In pension schemes, mortality tables are used to estimate how long pensioners are likely to live, so that funds can make certain they have sufficient reserves to pay pensions for those expected lifetimes. If mortality rates go down, i.e., people live longer, it means that the pension schemes need to be funded for a longer period.
Healthcare Coverage: Health insurance companies also use mortality tables. Similar to life insurance, they use it to determine the likelihood of a potential client dying within a certain time frame. However, they also use it to determine how likely someone is to develop certain chronic diseases or health issues based on their age, lifestyle, etc. This will impact the premium amount or if they should take on the client at all.
Mortality Table FAQs
What is a Mortality Table?
A mortality table, also known as a life table or actuarial table, is a table which shows, for each age, what the probability is that a person of that age will die before their next birthday. It is used by insurance companies to determine the pricing for various insurance policies.
How is a Mortality Table constructed?
A Mortality Table is constructed based on a wide range of demographic and statistical data. This may include data on age, gender, health status, occupation and many other factors. The data is analysed to determine the likelihood of a person in a specific cohort living to each age.
What is the purpose of a Mortality Table?
Mortality Tables are used in a number of different areas. They are primarily used by insurance companies to determine risk and set prices for life insurance policies. They can also be used by pension plans to determine how much to pay out to retirees. In addition, they are also used by researchers and government to predict future changes in population.
Why does a Mortality Table matter in finance?
In finance, Mortality Tables play a significant role in determining the risk associated with life insurance policies, annuities, and pension plans. Insurers use them to estimate future claims while pension plans use them to estimate long-term obligations. Thus, accurate Mortality Tables contribute to financial stability and profitability.
Is a Mortality Table reliable?
While a Mortality Table is a useful tool, it is not infallible. It’s an estimation based on statistical averages and it doesn’t account for unpredictable factors or individual variations. Therefore, there’s always some degree of uncertainty when using these tables.
Related Entrepreneurship Terms
- Life Expectancy
- Actuarial Science
- Life Insurance
- Underwriting
- Annuity
Sources for More Information
- Investopedia – Its comprehensive and well-explained database makes it a great source for finance and investment terms including the Mortality Table.
- The United States Social Security Administration – Given its role in managing social security benefits, it provides valuable information regarding Mortality Tables.
- The Administration for Community Living – As an organization focused on enhancing the quality of life for older adults, it offers relevant information on Mortality Tables.
- The United States Census Bureau – As a source of comprehensive demographic information, it can provide relevant data tied to Mortality Tables.
