What Is a Select Mortality Table?
A select mortality table is a mortality table, a grid of numbers showing how long people of different demographics are expected to live, based only on those individuals who have recently purchased life insurance policies. These individuals tend to have lower mortality rates than individuals who are already insured, due chiefly to the fact that they have most likely just passed certain medical exams required to obtain insurance.
- A select mortality table provides data on the death rate of individuals who have recently purchased life insurance.
- These individuals tend to have lower mortality rates than people already insured because they most likely recently passed certain requisite medical exams.
- Select mortality tables seek to verify if this trend holds.
- Insurance companies rely on select mortality tables, alongside other types of mortality tables, to determine how much to charge applicants for coverage.
Understanding a Select Mortality Table
Insurance companies use select mortality tables, alongside other types of mortality tables, to calculate the risks associated with each applicant. From them, they can determine whether it is profitable to offer coverage and, if so, how much to charge for it, in the form of premiums.
Life insurance companies use mortality tables to help calculate premiums and to make sure they remain solvent.
Typically, people who have recently purchased life insurance, a contract guaranteeing payment of an agreed-upon sum to a designated beneficiary in the event that the policyholder should die, are less likely to pass away than people who took out these policies in the more distant past. That’s because those who purchase life insurance policies often have to go through physical examinations to be approved.
If they are approved, it usually means that they have at least a decent level of health. The same cannot be said, or at least proved, for people who bought life insurance years or even decades ago. Select mortality tables are used to verify that this trend holds.
Select Mortality vs. Ultimate Mortality Tables
Ultimate mortality tables usually omit the first few years of life insurance data. The argument goes that removing this bias eliminates the risk of data being skewed, helping to make mortality rates more accurate.
The difference between "select" and "ultimate" mortality rates is apparent when someone applies for life insurance, and the company has an opportunity to check the prospective policyholder's health. The medical selection process screens out unhealthy applicants, so the accepted applicants have a lower chance of dying in subsequent years. This effect gradually wears off over 15 to 25 years.
Mortality tables were first introduced by Raymond Pearl in 1921 for the purposes of furthering ecological studies.
By re-applying for life insurance, a policyholder can put themselves in a new pool of healthy insureds. The cost of coverage will reflect the difference between select (insureds whose health has recently been checked) and ultimate (not recently examined) mortality rates. Any savings will be partially offset by new acquisition costs, including selling expenses (commissions and other costs), underwriting and administrative costs, and state premium tax.
The differing resulting rates are significant for insurers, who tend to be conservative in their estimates when determining their reserve liabilities. They would consider the mortality experience of those for whom the benefits of the medical selection process have passed. When a mortality table is constructed from the experience of insured lives without regard for the duration of the insurance, it is called an aggregate mortality table.