What is Select Mortality Table
A select mortality table outlines life contingency statistics for a certain period of time. A select mortality table includes mortality data on individuals who have recently purchased life insurance. 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.
BREAKING DOWN Select Mortality Table
Insurance companies use select mortality tables (and other types of mortality tables) in order to determine proper premiums and fees that must be charged to individuals seeking insurance in order to be profitable. Select, ultimate and aggregate mortality tables can all be used by insurance companies in order calculate the risks associated with individuals seeking insurance.
Typically, people who have recently purchased life insurance policies are less likely to die than people who have purchased life insurance policies in the more distant past. This is because those who purchase life insurance policies often have to go through physical examinations to be approved. So, if they are approved, it usually means that they have at least a decent level of health. The same cannot be said, however, for people who have purchased life insurance years or even decades ago. Select mortality tables are used to verify that this trend holds.
Rate Differences on Ultimate vs. Select Mortality Tables
The difference between "select" and "ultimate" mortality rates is apparent when someone applies for life insurance, the company has an opportunity to check the prospective policyholder's health. This 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. By re-applying for life insurance, a policyholder can put themselves in a new pool of healthy insureds, and the cost of your coverage will reflect the difference between select (i.e., related to insureds whose healthy has recently been checked) and ultimate (i.e., not recently checked) mortality rates. This 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 is 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.