Understanding Mortality Improvement

A husband and wife looking at paperwork while sitting at a laptop

There are a number of fallacies about how micro-longevity underwriting works that seem to pervade the marketplace. One that I hear far too often goes something like this: “Life settlements accrue value every time the insured has a birthday.” The implication is that the passage of time alone (i.e., getting older) decreases life expectancy (LE). This is simply not true. While it is true that, in general, as we age, we get closer to the end of our lives, it is not true that as we age, the value of an asset tied to our lives, such as life insurance, always goes up. Put simply, getting a year older does not mean your life expectancy is shorter. It’s just not that cut and dried.

Age Alone is Not the Critical Factor

It is not uncommon to see insureds who were, in year one at age X, impaired and thus assigned a life expectancy of Y months. However, when we see that same insured at age X + 1 year, and if they are in an improved state of health, it is entirely possible their life expectancy has improved and thereby increased to Y + 1 or more. In other words, age alone does not increase the micro-longevity risk associated with an individual.  Other factors have to be considered, and that’s why underwriting is critical to life settlement valuation. In short, life expectancy can increase from year to year in many cases; it doesn’t always get shorter.

Related: Estimating the Life Expectancy of Individuals is an Underwriting Exercise

How Does This Affect Life Settlement Value?

As we know, the shorter the LE used, the higher the value of the policy, all other things being equal. The inverse is true, longer LEs produce lower policy valuations. In addition, not only can life expectancy increase for some insureds, but carrying costs associated with life settlements (e.g., the cost of insurance or COI), which are life insurance contracts, generally increase from year-to-year, sometimes significantly. Again, there are other factors to consider, and age, life expectancy, or premiums viewed  individually, do not tell the whole story for a given policy.

The statement above is directly tied to the concept of mortality improvement, which sadly is not well understood by many. In layman’s terms, mortality improvement is the term used to describe the measurement of the reduction in mortality rates associated with a cohort, population, or individual from one year to the next. 

For example, the introduction of vaccines for some diseases was responsible for a general increase in the life expectancies of the populations that received them. The mortality improvement factor-vaccination-benefitted large segments of the global population. In life expectancy underwriting, a mortality improvement might be observed through the passage of time. For example, if a cancer patient does not experience a reoccurrence within a certain number of years, their risk of dying decreases, and their expected mortality improves. The success of a treatment protocol, such as significant and sustained stability in the management of a disease, might earn the insured a reduction in the debits previously allocated to the condition being treated. These forms of improvement can actually be observed in a simple reduction in the attribution of excess mortality (also known as a reduction in the increased risk of early death) assigned to the insured when they were first underwritten.

Related: Life Expectancy Underwriting and Life Expectancy Calculators are NOT the Same Thing Redux

ISC Can Help You Discover How Life Expectancy Data Affects Your Life Settlement Value

So to say, “The older you get, the shorter your LE, and the shorter your LE the greater the value of the life settlement based on your life,” is misleading at best. The first clause is not true, and the second clause is true, but taken as a whole, the conclusion it draws is simply incorrect. The concept of mortality improvement as it relates to life expectancy underwriting is an important concept to understand, and while these concepts sound like common sense, they are not. The application of mortality improvement factors acknowledge that the health of an individual can improve in many cases, and when this occurs, it can improve life expectancy for that individual. Thus, a life settlement covering that same insured can decrease in value under such circumstances. To learn more about accurate life expectancy assessments, contact ISC Services today.