Impact of Morbidity & Mortality on Life Insurance Premium & Benefits

Impacts of Morbidity in Life Insurance policies:

Morbidity in life insurance refers to the likelihood of an insured individual becoming ill or disabled during the policy term. Unlike mortality, which deals with the risk of death, morbidity focuses on the risk of illness or disability.

When assessing morbidity risk, insurance companies consider factors such as age, gender, occupation, lifestyle, medical history, and overall health. Those with higher morbidity risk are likely to pay higher premiums because they pose a greater financial risk to the insurer.

The impact of morbidity on life insurance premiums and benefits can vary based on the type of policy:

1. Term Life Insurance: Morbidity can substantially impact premiums in term life insurance. When an individual presents medical conditions that heighten the risk of additional health issues, insurers may impose Extra Mortality Charges ranging from 50% to nearly 300%. Conditions like hypertension or diabetes can escalate the likelihood of developing heart, kidney, and other related diseases, prompting insurers to adjust premiums accordingly. Additionally, morbidity indirectly influences premiums when insurers offer policy riders covering disability or critical illness, leading to premium increases.
2. Permanent Life Insurance: In permanent life insurance policies such as whole life or universal life, morbidity can have a more significant impact. These policies typically have a savings component (cash value) in addition to the death benefit. If the insured becomes ill or disabled, they may access the cash value through policy loans or withdrawals to cover medical expenses or lost income. However, morbidity risk can increase the cost of insurance charges deducted from the cash value, potentially reducing the policy's growth or requiring higher premiums to maintain coverage.
3. Disability Insurance: Disability insurance policies specifically cover the risk of illness or injury preventing the insured from working and earning an income. Morbidity risk plays a central role in determining premiums for disability insurance. Individuals in high-risk occupations or with pre-existing health conditions may face higher premiums or exclusions for certain conditions.
4. Critical Illness Insurance: Morbidity directly impacts premiums for critical illness insurance, as these policies provide a lump-sum payment upon diagnosis of covered illnesses or medical conditions. Premiums are based on the insured's age, health status, lifestyle, and the selected coverage amount and duration.

Overall, morbidity risk influences life insurance premiums and benefits by affecting the likelihood of illness or disability during the policy term. Insurers use actuarial analysis and underwriting guidelines to assess morbidity risk and determine appropriate pricing for policies.

Impacts of Mortality on Life Insurance policies:

Mortality refers to the likelihood of an insured person passing away during the policy term. Here are a few key aspects related to mortality in insurance:

1. Mortality Assumptions: When calculating policy liabilities for insurance contracts, actuaries use mortality assumptions. These assumptions consider relevant data available for the firm and the specific contracts. If the firm’s own mortality experience is limited, they may rely on appropriate experience from a relevant insurance market . These assumptions play a crucial role in determining the financial obligations of insurers and help estimate the expected number of deaths within a given population.
2. Mortality and Expense Risk Charge: In certain insurance products (such as annuities), there is a fee called the mortality and expense risk charge. This fee compensates the insurer for potential losses resulting from unexpected events, including the death of the policyholder. The charge is influenced by factors like the applicant’s age and is typically around 1.25% annually .
3. Increasing Death Benefit: In life insurance, policyholders can choose between a Non-Indexed or level death benefit (where the payout remains constant) and an Indexed or increasing death benefit (where the benefit amount grows over time). The increasing death benefit option ensures that the benefit paid out upon the insured’s death increases gradually, providing additional protection against inflation and other factors .

Premium of such INDEXED policies increases on each annual anniversary & consequently, increases the Death Benefit & some Supplementary Benefits proportionately. For example, If premium increases by 10%, the Death & Supplementary Benefit(s) will also increase proportionately (i.e by 10%) without going thru any new underwriting process.

Mortality Tables:

To understand it more deeply, look at the link below:

https://www.ssa.gov/oact/STATS/table4c6.html

This table includes detailed statistics like death probability, number of lives, and life expectancy for each age, and it’s differentiated by gender due to different mortality rates.