Life expectancy is the statistical age that a person is expected to live. There are many uses for it in the financial world. In most countries, the calculation of the statistical age is from a national statistical agency.
Breaking Down Life Expectancy
Life expectancy is used by insurance companies to determine insurance premiums. Using tables provided by the Internal Revenue Service, these companies try to minimize the liability risk.
Life expectancy is the primary factor in determining an individual's risk factor and the likelihood they will make a claim. Insurance companies consider age, lifestyle choices, family medical history, and several other factors when determining premium rates for individual life insurance policies.
Life Expectancy in Annuity and Retirement Planning
Your life expectancy is also a significant factor when arranging annuity payments with an insurance company. In an annuity contract, the insurance company agrees to pay a certain amount of money for a fixed period or until the policyholder's death. It's important to take life expectancy into account when negotiating annuity contracts. If you agree to receive payouts for a specific period, it is tantamount to estimate how long you might expect to live. You may also elect to use a single-life annuity payment plan in which annuity payments will cease after your death.
Life expectancy is also critical for retirement planning. Many aging workers arrange their retirement plans' asset allocations based on a prediction of how long they expect to live. Personal, rather than statistical, life expectancy is a primary factor in the character of a retirement plan. When couples are planning for retirement or 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 the plan. Most retirement plans expect participants to begin distributing at least the RMD by the time they reach the age of 70.5. Retirement plans set distribution on the IRS life expectancy tables. Some qualified plans may allow RMD distribution to begin at a later date.
Overall, human life expectancy has been rapidly increasing during the past two hundred years, particularly in developing countries. Today, the average life expectancy in the United States is 78.8 years.