What it means
No one can say how long an individual will live, but across large groups mortality (the chance of dying in a given year) follows stable patterns by age. Actuaries therefore need a consistent way to say how old a person is for pricing purposes.
That consistent figure is the actuarial age. Insurers define it in different ways.
Age last birthday simply uses completed years, while age nearest birthday rounds to the closest birthday, so someone who is 40 years and 7 months old is treated as 41. Policy documents state which convention applies, and a person near a birthday can pay less by buying cover before the rounding point.
Some insurers also use a rated age for applicants with health problems or risky habits. A rated age adds years to the true age, so a 50-year-old with a medical condition might be priced as if 56.
The extra years stand in for the higher mortality the insurer expects. Actuarial age feeds into life tables, which show the chance of dying and the average years remaining at each age.
Life insurance is cheaper at younger ages because the insurer expects to collect premiums for many years before paying a claim. Annuities work the other way, since a longer expected life means the provider expects to make more payments, so each payment is smaller.
Actuarial age is not a personal prediction. It describes the average experience of people with a similar profile, and your own longevity depends on health, family history and luck.
Tables also come in two types: period tables snapshot today's death rates, while cohort tables follow a generation through its whole life. For individuals and managers, the practical lesson is to check how age is defined before comparing quotes.
Two quotes for the same person can differ simply because one uses age last birthday and the other uses age nearest birthday. Keep life tables current too, since using a stale table misprices longevity.
In practice
Real-world examples.
Example
A life insurer quotes a healthy 40-year-old non-smoker a low premium. The tables say someone of her age and profile will probably live for decades, so the insurer expects many years of premiums before any payout.
Example
A 52-year-old with a managed heart condition applies for term cover and is offered a rated age of 58. The premium is calculated as if she were six years older, which is how the insurer prices the extra risk without refusing her.
Example
Two brokers quote the same client, who is 40 years and 7 months old, and one price is higher. One broker uses age nearest birthday, which makes him 41, while the other uses age last birthday, which makes him 40.
Formula
Calculation
Premium = rate per $1,000 of cover x (cover / $1,000), where the rate depends on actuarial age. Take a $250,000 policy, which is 250 units of $1,000. Using an illustrative rate table, age 50 costs $6 per unit and rated age 56 costs $9 per unit. At age 50 the premium is 250 x $6 = $1,500 a year, and at rated age 56 it is 250 x $9 = $2,250 a year, so six extra years of rated age add $750.Case study
Seen in the real world.
Fenwick Mutual is a fictional insurer used for this illustrative case study. A 49-year-old engineer applies for cover, and the underwriter assigns a rated age of 53 because of his medical history.
After a year of improved health readings he reapplies and is assessed at his true age of 50 with no rating, which cuts his premium. The case shows that actuarial age is a pricing input that can move, not a fixed label.
Watch out
Common mistakes.
- Reading the actuarial age as a personal forecast; it is an average-based pricing input, and half of people outlive an average.
- Ignoring the age convention in a policy; age last birthday and age nearest birthday can produce different premiums for the same person.
- Using an old life table; longevity changes over decades, so pricing or planning from a stale table misprices the years.
Questions
People also ask.
What is a rated age?
It is an age higher than the applicant's true age, used by an insurer to price extra risk from health conditions or habits, so the premium reflects the greater chance of a claim.
Is actuarial age the same as life expectancy?
No. Actuarial age is the age used for pricing, while life expectancy is the average number of years remaining that a life table associates with that age.
Why is life insurance cheaper when you are young?
Because a young person will probably pay premiums for decades before any claim. The longer the expected period of premiums, the lower the annual price of the cover.
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