Mortality Table

A mortality table is used to:

1. A.Set interest ratesThe interest assumption is a separate pricing input, drawn from what the insurer expects to earn on invested premium. The table speaks only to the probability of death at each age.
2. B.Measure inflationAn economic statistic with no place in the table. Mortality data records deaths per thousand lives at each age, not changes in the price level.
3. C.Track stock pricesMarket data has nothing to do with how long people live. Even for products whose crediting is market-linked, mortality is priced from experience tables entirely separately from investment results.
4. D.Estimate the probability of death by ageCorrect - mortality data prices policies.

Why: A mortality table estimates the probability of death at each age, a key premium input.

An underwriter at Cordova Life explains that the company's whole life pricing rests on a MORTALITY table, while its disability income pricing rests on a MORBIDITY table. The distinction is that a mortality table predicts:

1. A.Deaths per thousand lives at each age, while a morbidity table predicts the incidence and duration of sickness or disabilityCorrect. Mortality measures dying; morbidity measures getting sick or disabled and how long it lasts.
2. B.The average age at which policies lapse, while a morbidity table predicts claim severityLapse behavior is a persistency assumption, not mortality. Neither table measures lapses.
3. C.The incidence of disability at each age, while a morbidity table predicts life expectancyThis swaps the two terms. Disability incidence is morbidity.
4. D.The insurer's expected investment return, while a morbidity table predicts its expense ratioInterest and expense are separate pricing factors. Neither table addresses them.

Why: A mortality table shows the expected number of deaths per thousand lives at each age. A morbidity table shows the expected incidence and duration of sickness or disability. Life insurance is priced from mortality; disability and health products are priced from morbidity. The clue is the pairing of two different products in the same sentence.

Halloran Mutual prices its annually renewable term using a select-and-ultimate mortality table. Deshawn bought ART at age 35 and is now 40; Priscilla is buying brand-new ART today at age 40, both at standard rates. Which statement about the premium each pays this year is correct?

1. A.Deshawn pays less, because his premium was locked in at his original issue age of 35This confuses annually renewable term with level term or original-age conversion. ART premiums rise every year with attained age; nothing is locked in.
2. B.They pay the same, because annually renewable term is priced purely on attained ageAttained age is the dominant factor, but this ignores the select-and-ultimate structure the stem specifically describes. If age alone controlled, the table would have only one set of rates.
3. C.Priscilla pays less than Deshawn, because she sits in the select period while his rates have graded toward the ultimate tableCorrect. Select rates reflect the mortality of lives just examined and are lower than ultimate rates at the same attained age.
4. D.Priscilla pays more, because a brand-new policy carries first-year acquisition costs that Deshawn has already amortizedFirst-year expense loads are real, but the mortality difference runs the other way and dominates. Insurers advertise re-entry precisely because new underwriting lowers the rate.

Why: A select-and-ultimate table separates freshly underwritten lives (the select period) from lives underwritten years ago (the ultimate table). Someone who just passed a medical exam is a demonstrably better mortality risk than someone the same age whose exam is five years stale, because health can only have deteriorated since. So Priscilla, newly selected at 40, pays less than Deshawn, whose rates have graded toward ultimate mortality. The clue in the stem is that the insurer uses a select-and-ultimate table at all, which is the only reason two standard-rate 40-year-olds would be charged differently.