‘When will you die?’ is a song by an American alternative rock band, They Might Be Giants (TMBG).
But there’s one thing
That everyone’s wondering
When will you die?
People have labelled this song as the best “hate” song ever. Others wished they would like to listen to it on their deathbed.
Whether it is a “hate” song, this phrase is hated for sure. Death is the last thing you would think about when you are full of life.
It amazed me that an industry survives merely on this very phrase and the prediction of death.
I discussed death with a life insurance professional when I was doing a story. He was in a firm for the last seven years and well versed with the data.
I wanted to know how come insurance of life works? Do they know when a person will die? How do they decide different terms for different customers for the same policy? How does a company find that this person will live for a certain specified period?
I had many questions for him. How do you calculate the premium amount in a specific case? What is your success rate in the calculation of someone’s death? What if the predictions go wrong? How significant are the losses then? What is an insurance company’s success rate per thousand death cases?
What I got to know was very interesting and surprising for me.
It is no mystery that we can’t calculate our steps to death. But there is a science that can, and it runs almost all big financial corporations of the world.
Mathematics Comes To Rescue
Actuarial Science decides the rules for an insurance company. This discipline applies mathematics and statistics to assess risks. It claims to see through the dangers unseen to us typically, including our death, not the exact date but in terms of specifics of demographic.
Actuarial Science was born out of the necessity to cover the losses in case of a breadwinner’s death. In the 16th century London, a draper John Grant found that a group of people of the same age displayed the same longevity and mortality. Later, this study became the basis of Actuarial Science as we know today.
Actuaries (or practitioners of Actuarial Science) serve almost all industries these days.
My concern was with life insurance actuaries only. For me, it is fascinating that the prediction of death is possible, applying no pseudo-science.
Mortality Is The Buzzword
Death is inevitable, we all know, and we all have some reservations in uttering this word.
The same is valid with actuaries. Instead, their favourite word is- Mortality.
Compared to actuaries, insurance professionals offend their customers more with their ‘death prospectives.’
They believe that without fear of death, no one will buy their product. They calculate Death Expectancy and term it as Life Expectancy.
Your Remaining Years Dictate Policy Premium
Yes, the most interesting part is this.
The insurance sector stands on the complex set of data actuary analyses. This data decides your yearly premiums based on your life expectancy.
Britannica defines life expectancy as an ‘estimate of the average number of additional years that a person of age can expect to live.’
Several factors contribute to life expectancy. It includes your current age, gender, race, medical condition, and family medical history. And non-personal part of this data comes through economic, health and social surveys conducted by the government agencies from time to time.
Actuaries suggest insurance premiums after permutations and combinations of different data sets.
One such formula is the remaining years of your life, which decides how much return on investment (ROI) will you get at the end. The method is -
Payout to Beneficiary — Amount Paid into Policy at Time of Death = Return on Investment
Let’s say you have a policy that promises to pay $100,000 in case of your death. You paid only $20,000 as premium and died, then the ROI on your investment will be $80,000.
Here age is a crucial factor that can severely impact your policy premium. That’s why companies insist that you buy a life insurance policy at the earliest age.
Actuarial Science says that a young person is less likely to die soon, so he/she poses a low risk to the company. But if you are older, the premium amount will be higher because you may die sooner, posing a high risk to the company.
Ingredients of The Mortality Formula
Sometimes it seems the truth of the human’s immortality is in the hands of actuaries. They have the most crucial information on the expectancy of people’s lives.
Actuaries have gender, age, weight, height, income, education level, exercise, smoking, liquor, road accidents and Type-2 diabetes data of your demographic area. Don’t confuse it with individual information.
This data comes from various national and international agencies.
Now another secret.
All this information lies in the treasure chest of Mortality Rate Tables. Actuaries call them Life tables, i.e., excel sheets full of illegible numbers like some secret code.
These tables predict a person’s likelihood of death in the current financial year. Or in laymen understanding, probability of a person’s death before his/her next birthday.
These tables are not only a lifeline for the insurance sector but crucial for Social Security Administration and other government plans too.
Another important factor apart from life expectancy is a person’s longevity (i.e. how long you might live). Longevity also plays a vital role in your policy premium plans.
Who Is the Forecaster
Till our lives are full of risks, an actuary’s job is safe. They have to with the probabilities of death and life.
It is an overly specialised field as opposed to economics or accounting. They study the past and have an eye on the future.
Actuaries exist at the frontiers of history, gerontology, demography, economy and medical science. You can call them real multidisciplinary and tech-savvy professionals.
Their only challenge is biology. When biology changes, their data becomes useless. And so the prediction of risk.
CareerCast has rated actuaries job with 22% growth outlook by 2026.