Life insurers always run a risk when entering into contracts with guaranteed lifelong pension benefits. Because they do not know how old a person will get and how long they will have to pay the pension. They use mortality tables for the calculation. They represent the statistical basis for a person’s probability of death. At the same time, they must not lose sight of increasing life expectancy. But how is it all related?
What does life expectancy have to do with private life insurance?
With private pension insurance, people want to make provisions for their old age and secure lifelong pension payments in addition to the statutory pension. In contrast to savings plans at the bank, with funds or other financial products that do not offer such a guarantee. If the capital is used up, there is nothing left to finance the pension. In order to really be able to afford here until the customer no longer needs a pension, careful calculation with a lot of foresight is required. From the insurers’ perspective, long life expectancy results in long annuity payments. Sufficient capital must be available for this, otherwise the insurer cannot provide the guaranteed benefits, for example for the Riester pension. When calculating the premium, you always use statistical life expectancy as a basis. Among https://www.destatis.de/ the Federal Statistical Office has published the current figures.
Disability insurance – also a pension insurance
With occupational disability insurance, I protect people in the event that they can no longer work permanently or at least for a long time after an accident or a serious illness. The state pays benefits in the event of occupational disability. But there is always a large gap between the previous income and the pension that is then paid. With a private disability insurance, such as that under https://www.comfortplan.de/ is presented, this gap closes. But here, too, demographic change and an uncertain time of death represent a major challenge for insurers. Pension payments do not begin at a certain age, but when a certain event occurs.
What is a life table?
With the help of a life table, insurers can calculate the probability that someone who is a certain age today will still be alive in a certain period of time. These mortality tables differentiate between the sexes because the life expectancy of women is on average higher than that of men. For example, an expert – actuaries at insurance companies – can use this information to determine how likely it is that a woman born in 1969 will live to be 90 years old.
Two types of life tables
Basically, two types of life tables can be distinguished: the period life table and the generation life table.
- Period life table:
This life table is a snapshot. It shows the mortality rate of a group of people at a specific point in time. The table gives precise information for each age, how the mortality of people of a certain age behaves at the time the table was drawn up.
- Generational mortality table
This life table focuses on the mortality course of birth cohorts. For people of a certain age, the board reflects the mortality course from birth to death. Changed mortality rates or improved life expectancy are also taken into account.
Many use the two terms like synonyms. But this is not true. A period life table cannot be used to make any assumptions about future mortality rates. But this is exactly the aspect that pension insurers consider. Because the policies focus on life expectancy in 30 or 50 years.
What do life insurers calculate with?
Life insurance actuaries are interested in the generation mortality tables. The creation of these tables is based on the following data:
- Information from the statutory pension insurance
- Data from the Federal Statistical Office
- Experience of the insurers
The actual situation in terms of life expectancy and mortality is not shown in the life tables.
The life tables do not reflect the status quo in terms of mortality and life expectancy. If they did that, the probability would be high that in the end there would not be enough money in the collective’s pension pot to pay the lifelong pensions.
The insurers are trying to read in a crystal ball and dare to look into the future. In doing so, they take into account trends that can result in a longer life expectancy. In addition, they use their experience from the past and a few other factors that contribute to the fact that children often get older than their parents:
- increasing prosperity
- healthier lifestyle
- medical progress
- higher level of education
- more humane working conditions
Insurers are also thinking that life expectancy will increase in the future. In addition, with every year of life that is gained, the probability of getting even older increases. This is why it is so important for insurers to take a dynamic, forward-looking view.
Unpredictability of the future
Looking into the future gives insurers no guarantee that what their actuaries calculate will actually happen. Nevertheless, they have to promise their customers a guaranteed interest rate, as shown below https://www.gdv.de is to be read. That is why they take additional security into account. This enables insurers to pay the guaranteed benefits even if life expectancy develops very differently and the insured person becomes much older than expected. The insured will receive the money that has been included as security back in the form of a bonus.
07/27/2021