A mortality table, sometimes referred to as a life table, is a table that shows the probability that a person of a certain age will die before his or her next birthday.
Mortality tables are prepared by actuaries and are used primarily by life insurance companies in order to help with product pricing, expected claims-paying obligations, and other things.
There are two major types of mortality tables: static tables and cohort tables. Static tables estimate the current probability of death for everyone in a given group. Cohort tables estimate the probability of death of everyone in a given cohort – most commonly, birth year – over the course of their lifetime.
Although life insurers are the largest group of mortality table users, other organizations use them, too.
Mortality in Life Insurance
When a person purchases a life insurance policy, the insurance company consults a mortality table in order to estimate how long the insured person will live – and by extension, how long the insurance company can expect to receive premium payments from the person. Generally, the younger a person is when they purchase life insurance, the lower their premium charge will be. This is because the insurance company can expect to collect premiums for a longer period of time than they could with an older person.
Mortality tables are important tools for the management of existing life insurance policies, too. An insurance company can use a mortality table to estimate how many of their insureds will die in a given year, so they can know how much money they will need to have on hand to pay expected claims.
Mortality in Annuities
Annuities are long-term insurance contracts intended for retirement planning, and they involve exchanging a purchase payment to the insurer for a series of income payments, either immediately or at some point in the future.
While life insurance policies are more profitable if the insured person lives a long time, the opposite is true for annuities that are in their payout period. This is because annuities are usually paid out during a person’s retirement years, which is when they are likely to die. The longer a person lives under this scenario, the longer they will be a financial burden to the insurance company.
For this reason, when a person begins taking income from their annuity for retirement planning, the insurer will consult the mortality table to estimate how long they will be paying an income stream to this person. This, along with other factors such as interest rates and the amount invested, determines how much a person’s periodic income payment will be.
Mortality Table Uses Outside of Insurance
As mentioned previously, life insurance companies aren’t the only users of mortality tables.
Those who engage in demography, that is, the quantitative study of human populations, use mortality tables in their research. Demographers study things such as the geographical distribution of people, birth and death rates, and age/sex distributions of people.
Mortality tables are also used by epidemiologists, who study the spread of disease and its effects.
The U.S. Social Security Administration examines the mortality tables of all people receiving Social Security benefits. This aids in the administration of the program.