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Life Expectancy: Factors That Impact Your Term Plan Premiums

People often consider life expectancy to be just a number. But it is much more than that. It is essentially a guess about what age would you die at. This guess is made by taking into account your health records, lifestyle, and many other factors. Whether it is accurate or not, the number is used in the financial world to make more informed decisions. 

For example, life expectancy is one of the biggest factors that insurance providers look at in order to decide how much premium they would charge you for a term plan. Using the relevant data, insurance companies assess the risk of selling you a term plan and will try to minimize their risk by offering you a high premium if your life expectancy is low. To figure out reasonable premium rates for policy buyers, insurance companies include age, lifestyle choices, and family medical history along with factors to decide your ideal premium. 

Factors That Determine Life Expectancy

There is a long list of factors that have an impact on your life expectancy. Two of the best examples of this are the time you were born and your gender. Some other factors that influence your life expectancy are: 

  • Medical conditions
  • Family’s medical history
  • Lifestyle
  • Socio-economic status
  • Income
  • Employment

How Does Life Expectancy Affect Term Insurance Premium?

Simply put, life expectancy and term insurance are directly connected to each other. Your premium is based on how long you might live. The simple logic is that the younger you are, the less chance you have of dying. Hence, covering you is not a risk for term insurance providers. That’s why when you buy term insurance at a young age, it costs much lesser. On the other hand, if you buy term insurance at a higher age, you are considered as a risky individual to cover. To compensate for the risk, they charge a bigger premium. 

Life Expectancy in Annuity

Some variations of the annuity plans are very similar to a term plan. Hence, it makes sense that life expectancy would affect annuity in a similar way as that of term insurance. When you go to figure out how to receive the payouts of the annuity plans, your life span plays a huge role. An annuity plan is essentially a contract. As per this contract, the insurance company agrees to make regular payments of the right amount for a fixed period of time or until the policyholder’s death. Hence, it is important for the insurance provider to have an idea of your life expectancy. Here is how your life expectancy can affect annuity plans:

  • If you go for a single life annuity option, your life expectancy is taken into consideration and you continue to receive payments as per the plan. These payments stop after you are dead. 
  • If you choose a joint life annuity with a defined payout period, your life expectancy decides how long you can continue to receive payouts for your plan. In the case of your death, while the policy is active, the nominee you appointed in your plan receives the remaining amount over the course of the remaining policy term
  • In the case of joint life option with survivor benefits, the annuity plan has a logic that the payments will continue to you or to your beneficiary in the case of either’s death. In case of your death, the amount payable to your beneficiary becomes lower. On the other hand, if the nominee dies first, you will receive full payments. This type of annuity plan is a great option for you and your beneficiary. Here the premium of the plan is decided based on your and your nominee’s life expectancy. 

Life Expectancy and Retirement Planning

Life expectancy plays a primary factor in the process of planning a retirement. Often, couples use a joint life expectancy where they consider the life expectancy of their partner as well, who becomes the beneficiary of a retirement fund or annuity plan. If you are an aging working individual, you can arrange your retirement plans’ asset allocations based on the estimate of how long you are expected to live. Also, traditional pension plans determine the implementation of required minimum distributions (RMD) based on the life span of an individual.

Knowing your life expectancy helps you understand your needs and the premium cost by insurance companies. With this, you can easily make informed decisions, especially about your annuity payment options. After all, it is always good to be well prepared for the future and safeguard your loved ones from any unforeseen exigencies.

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