Life Expectancy

DEFINITION of 'Life Expectancy'

Life expectancy in social science is the statistical age until which a person can be expected to live.

BREAKING DOWN 'Life Expectancy'

Life expectancy is a statistical measure used for a variety of purposes in the financial world. Life expectancy is generally recorded as a person's expected lifespan from birth (age 0) and can be represented as either an expected mean or as the true average age of individuals born in that year (which can only be calculated after all people born that year have passed away).

Human life expectancy has been rapidly increasing over the past two hundred years, particularly in developing countries. Today, the average life expectancy in the United States is 78.8 years. However, this is often a poor measure of an individual's life expectancy – if an individual makes it past infancy, for example, their life expectancy has already increased substantially. Similarly, more educated individuals tend to live longer.

Life Expectancy Calculation

Life expectancy is calculated by national statistical agencies in most countries and is used for many financial purposes, most importantly for insurance premiums. Insurance companies use life expectancy tables provided by the IRS to determine your premiums for life insurance. Insurance companies are trying to minimize their liability risk, and life expectancy is the primary factor in determining an individual's risk factor. Insurance companies consider age, lifestyle choices and family medical history when determining premium rates for individual life insurance policies.  

Your life expectancy is also a major factor when arranging annuity payments with an insurance company. In an annuity contract, the insurance company agrees to pay you an agreed-upon amount of money for an established period of time or until your death. It's important to take life expectancy into account when negotiating annuity contracts: if you agree to a certain time-period for the insurance payouts, it is tantamount to an estimation of how long you expect yourself to survive. You can also elect to use a single-life annuity payment plan, in which annuity payments will cease after your death.

Life expectancy is also important for retirement planning. Retiring workers arrange their retirement plans based on a prediction of how long they expect themselves to live. While most individuals or couples employ a planner to assist them in their retirement planning, personal, rather than statistical, life expectancy is a major factor in the character of a retirement plan. When couples are planning for retirement (or for annuity payments) they often use a joint life expectancy, in which they take the life expectancy of their partner (who may become the beneficiary of a retirement fund or annuity plan) into account as well.  

Most retirement plans, including the Traditional & Roth, SEP and SIMPLE IRA plans also use life expectancy to determine the implementation of required minimum distributions (RMD) for a plan participant. Most retirement plans require a participant to begin distributing at least the RMD by the time the reach the age of 70.5 (an age that itself has been determined using the IRS life expectancy tables).  Some qualified plans may allow RMD distribution to begin at a later date.

 

 

RELATED TERMS
  1. Life Expectancy Method

    A method of calculating annuity payments, by dividing the balance ...
  2. Required Minimum Distribution - ...

    The amount that Traditional, SEP and SIMPLE IRA owners and qualified ...
  3. Life Insurance

    A protection against the loss of income that would result if ...
  4. Longevity Risk

    The risk to which a pension fund or life insurance company could ...
  5. Beneficiary

    Anybody who gains an advantage and/or profits from something. ...
  6. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
Related Articles
  1. Mutual Funds & ETFs

    IHF: iShares US Healthcare ETF

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
  2. Retirement

    This Is How Retirees Live On $1 Million Dollars

    Learn how retirees use various strategies, including immediate annuities and traditional portfolio investing, to make $1 million last throughout retirement.
  3. Stock Analysis

    How Procter and Gamble Plans to Deliver 15 Billion Liters of Clean Water by 2020 (PG)

    Learn how Procter & Gamble plans to deliver 15 billion liters of clean drinking water by 2020 through its Children's Safe Drinking Water program.
  4. Retirement

    Why Are Annuities Important for Retirement?

    Understand how annuities work, and identify the benefits they provide for retirement, the most salient being a guaranteed income stream for life.
  5. Home & Auto

    A Look At Single-Premium Life Insurance

    Want to provide for your dependents and finance your own long-term care? Learn more here.
  6. Bonds & Fixed Income

    Explaining Types Of Fixed Annuities

    Learn about this popular retirement tool, its pros and cons and how annuities work to create a guaranteed regular stream of retirement income.
  7. Options & Futures

    What Is Your Risk Tolerance?

    Forget the cliches and uncover how much volatility you can really stand.
  8. Budgeting

    Retire From Work, But Not Personal Financial Planning

    Here are some personal finance tips for those who want to live well after work ends.
  9. Insurance

    Life Insurance: Putting A Price On Peace Of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  10. Taxes

    Avoiding Mistakes In Required Minimum Distributions (RMD)

    If you don't calculate your required minimum distributions accurately, you might have to pay an excise tax.
RELATED FAQS
  1. Is Russia a developed country?

    Though it once reigned alongside the United States as a world superpower, Russia is not classified as a developed country ... Read Full Answer >>
  2. Is Taiwan a developed country?

    As of 2015, the CIA World Factbook has yet to add Taiwan to its list of developed countries. However, many organizations, ... Read Full Answer >>
  3. Is the Philippines a developed country?

    The Philippines is not a developed country. The nation falls behind on every one of the most common metrics used by economist ... Read Full Answer >>
  4. Is South Korea a developed country?

    South Korea is widely regarded as a developed country. A few index providers still classify the country as developing, but ... Read Full Answer >>
  5. Is Turkey a developed country?

    There are no hard-and-fast criteria for what defines developed countries. Different organizations set different standards ... Read Full Answer >>
  6. Is Chile a developed country?

    As of 2015, Chile is the only country in Latin America that is generally recognized as a developed country. In 2010, the ... Read Full Answer >>
  7. Is Australia a developed country?

    Australia is one of the most developed countries in the world. The nation's per capita gross domestic product (GDP), one ... Read Full Answer >>
  8. Is the Netherlands a developed country?

    The Netherlands is a developed country. A developed country is typically defined as one exhibiting economic security and ... Read Full Answer >>
  9. Is Colombia an emerging market economy?

    Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >>
  10. Is Brazil a developed country?

    Brazil is not a developed country. Though it has the largest economy in South America or Central America, Brazil is still ... Read Full Answer >>
  11. Is the Social Security administration part of the executive branch?

    The U.S. Social Security Administration, or SSA, is an independent government agency under the purview of the executive branch. ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center