Why Does Life Expectancy Matter to Insurance Companies?


Quick Answer

Insurance companies consider life expectancy to be important because it determines how risky an individual is and the amount of the premiums that the individual pays, according to Insure.com. A shorter life expectancy also means that there is a higher chance of early payout to the insured.

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Why Does Life Expectancy Matter to Insurance Companies?
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Full Answer

The riskier the lifestyle of the individual, the more likely he is to pay a larger premium. Certain risk factors, such as smoking tobacco, drinking alcohol, having a family history of illness and having a high-risk profession can increase premiums because they shorten life expectancies, adds Insure.com. Insurance companies use life expectancy calculators and medical exams in determining the risk class of an individual. Risk classes range from super preferred to standard or substandard. Super preferred individuals present the lowest risk because they have the highest life expectancies; they therefore have the lowest premiums, because they are predicted to have a longer time to contribute to their life insurance.

The Internal Revenue Service provides life expectancy tables as guidelines for determining how long an individual is expected to live, states Investopedia. Gender and age affect life expectancy calculations the most. Although individuals can buy life insurance at any time, younger individuals pay lower premiums, because their life expectancy from the time they begin the policy is longer.

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