How Life Expectancy is (Actually) Calculated

A husband and wife sitting across a desk from a woman

It’s been mentioned before that there is a problem with the free life expectancy calculators online. Policy brokers and other businesses are mainly using them as a lead generation tool, and the self-reported data entered by consumers cannot be verified. For life settlement professionals or professionals in other industries looking for life expectancy assessments, ISC Services explains how life expectancy is actually calculated, and why “free” tools are not the way to go if you need an accurate assessment.

What Data is Needed to Calculate Life Expectancy?

What ISC Services’ calculator, or any life expectancy company calculator for that matter does is use a handful of input variables, possibly the transaction type into which the client entering, the insured’s age, sex, and smoking status, and a mortality rating, to define the mortality curve associated with the subject life. Of these inputs, the mortality rating is the most critical, but it is not “calculated.” Rather, the underwriting process is designed to produce a mortality rating that is entered into a calculator. If the calculator being used allows the user (i.e., the insured) to assess their own mortality by answering a few simple questions, the validity of the output produced becomes suspect. Why? Because most people do not objectively evaluate their own health correctly. If you’re more impaired than the average person in your population group, you have a higher mortality rating (a.k.a., mortality factor or mortality multiplier), and if you’re “average,” you may have a “standard” rating. However, an individual’s assessment of their own health is extremely subjective and is generally not based on a detailed understanding of all the factors involved. Therefore, the old GIGO rule (garbage in, garbage out) usually applies to self-assessment tools. Furthermore, all the calculator does is look up, on a mortality table where the midpoint of a curve that describes the individuals in that group and,  where you in particular, as a member of that group, fall along a mortality curve. If you are wrong about the rating, the output you get will also be wrong. 

Using a Mortality Curve

Typically, in the online environment there is no curve produced by these online calculators. If there is a curve, it is still likely to be based on incorrect input. Most people don’t understand that life expectancy is a defined term and that the number or “LE” generated by most online tools is simply the average number of months or years a member of a group of like kind individuals can be expected to live. Without thorough, experience-based underwriting, this figure is nearly useless in assessing longevity risk. An individual can die before or after the average and still be on the curve. What an LE Is not is a point-in-time estimate, for example: “you will die in 72 months.” Unfortunately, many investors in the retail sector and a lot of individuals on the street think of it in those terms. 

If you’re simply looking up on a mortality table where an individual falls, and then producing a curve based on self-selected input variables for that individual amongst a group of people like them, that’s easy. What is  hard, and much more critical is how each individual is evaluated relative to their unique medical history. For example, a 300% rating for a 79-year-old female nonsmoker compared to another 79-year-old female nonsmoker with different impairments but the same rating, will have the same life expectancy in terms of the calculation. However, the things that are driving Mrs. Jones’ mortality can be very, very different from what’s driving Mrs. Smith’s mortality, and without underwriting, the rating they may apply to themselves could be the same, even if it shouldn’t be. Thus the “free” calculator might tell them they are alike in terms of rating, when often nothing could be further from the truth.  

Calculation vs Assessment

Where most people get confused is that not everything involved in the underwriting process to determine the mortality rating is a “calculation,” as that term is formally used. First, a thorough assessment based on medical information must be conducted; underwriting is an assessment process. If an algorithmic assessment process simply says: “if this, then that” and “if that, then this,” the nuances and interoperability between impairments can be lost. Instead, these formulae try to shortcut the underwriting process and ignore the context that is critical to assessing micro-longevity risk. In other words, calculation is what happens at the end, after an accurate risk assessment is conducted. The calculation itself is just math. 

If you are looking for a life expectancy assessment that is based on thorough, thoughtful, experienced analysis, ISC Services can help. We provide life expectancy underwriting services that can serve you in the life settlements, financial planning, and senior living industries. Contact us today to find out how.