Life Expectancy

What Is Life Expectancy?

Life expectancy is the statistical age that a person is expected to live until, based on actuarial data. There are many uses for it in the financial world, including life insurance, pension planning, and U.S. Social Security benefits. In most countries, the calculations for this actuarial age is derived from a national statistical agency based on large amounts of data.

Key Takeaways

  • Life expectancy is a statistical prediction for how long a person will live.
  • Based on actuarial science, life expectancy takes into account several individual-level as well as population-level factors to arrive at a figure.
  • Life expectancy is used in pricing and underwriting life insurance and insurance products like annuities, as well as in retirement and pension planning.

Understanding Life Expectancy

Life expectancy is the single most influential factor that insurance companies use to determine life insurance premiums. Using actuarial tables provided by the Internal Revenue Service, these companies try to minimize the liability risk.

There are several factors that affect your life expectancy, the two single most important being when you were born and your gender. Additional factors that can influence your life expectancy include:

  • Your race
  • Personal health
  • Family medical history
  • Whether you smoke cigarettes or make other risky lifestyle choices

You can view the federal government's data on U.S. life expectancy on the National Center for Health Statistic's website and the Social Security Administration's Actuarial Period Life Table.

It's important to note that life expectancy changes over time. That's because as you age, actuaries use complex formulas that factor out people who are younger than you but who have died. As you continue to age past mid-life, you outlive an increasing number of people who are younger than you, so your life expectancy actually increases. In other words, the older you get (past a certain age), the older you are likely to get.

Overall, human life expectancy has been rapidly increasing during the past two hundred years, particularly in developing countries. In 2021, the average life expectancy in the United States was 76.1 years.

Life Expectancy and Life Insurance

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.

There is a direct correlation between your life expectancy and how much you'll be charged for a life insurance policy. The younger you are when you purchase a life insurance policy, the longer you are likely to live. That means there is a lower risk to the life insurance company because you are less likely to die in the near term, which would require a payout of the full benefit of your policy before you have paid much into the policy.

Conversely, the longer you wait to purchase life insurance, the lower your life expectancy, and that translates into a higher risk for the life insurance company. Companies compensate for that risk by charging a higher premium.

The principle of life expectancy suggests that you should purchase a life insurance policy for yourself and your spouse sooner rather than later. Not only will you save money through lower premium costs, but you will also have longer for your policy to accumulate value and become a potentially significant financial resource as you age.

Retirement and Annuity Planning

Life expectancy is 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 and Roth, SEP, and SIMPLE IRA plans, also use life expectancy to determine the implementation of required minimum distributions
(RMDs) for the plan. Most retirement plans expect participants to begin taking at least the RMD by the time they reach the age of 72 (or age 73, starting in 2023). Retirement plans set distributions on the IRS life expectancy tables. Some qualified plans may allow RMD distributions to begin at a later date.

Due to an increase in life expectancy, Congress adjusted the required minimum distribution age from 70½ to 72 in 2019, and again to age 73 starting in the year 2023.

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.

What Is the Average Life Expectancy in the US?

The average lifespan at birth for a woman in the United States is 79.1 years as of 2021, according to the Centers for Disease Control. The average lifespan for men at birth was 73.2 years. This represents a decline from prior years, largely due to drug overdoses, accidents, and the COVID-19 pandemic. The overall life expectancy is 76.1 years.

How Does Life Expectancy Factor in to Insurance?

Life insurance companies use mortality tables to estimate the life expectancy of their policyholders, based on the statistical averages for people with similar ages and health. This allows them to predict how much money they will have to pay out in claims.

How Does Life Expectancy Factor in to Taxes?

When you retire, the IRS uses actuarial tables to estimate your remaining lifespan during retirement. This number is used to calculate your required minimum distributions—the mandatory withdrawals from certain tax-advantaged retirement accounts that you must take starting at age 73.

Article Sources
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  4. Internal Revenue Service. "H.R.2617 - Consolidated Appropriations Act, 2023."

  5. Internal Revenue Service. "Retirement Topics-Required Minimum Distributions (RMDs)."

  6. Internal Revenue Service. "Retirement Plan and IRA Required Minimum Distributions FAQs."