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Medical underwriting and life expectancy estimates

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When confronting one’s own mortality, the average person is usually in denial. Armand Hammer, a well known industrialist and geo-political power broker, worked right up to the day he died at age 96. In fact, six months prior to his death, he had ordered six custom tailored suits and 35 pairs of slacks. Obviously, he was too busy maintaining his schedule to take notice of his own mortality.

Historically, life expectancy has largely been the central focus of life insurance companies and their actuaries. But in recent years we have witnessed the development of a secondary market for life insurance policies involving insureds 65 and older who no longer need insurance. Once sold, these policies are referred to as life settlements. Valuing a life insurance policy requires the buyer to develop a life expectancy on the insured. In this case, life expectancy is based on estimating medical mortality while ignoring the risk of accidental death.

Companies that specialize in assigning life expectancies have evolved. Individually, the life expectancies assigned are not all that precise. No one can predict the exact year a person will expire from natural causes. However, based on a group of 200 or more individuals, medical underwriting firms believe that they can statistically predict mortality (dying from natural causes) of individuals within an accuracy of plus or minus 10 percent.

The concept of life expectancy has far broader applications than simply to price life settlements. Knowing one’s life expectancy is critical in addressing the risk of outliving one’s savings. Financial advisors and estate planners can use this information to optimize financial performance for a client’s investment, while at the same satisfying the issue of suitability. Furthermore, it’s relevant in managing and planning one’s retirement options and financial planning strategy. What the later years may mean to you, may well determine your investment strategy and asset allocation.

Peter Klein is the director of life settlements at Capitas Financial. He can be reached at [email protected]