Life expectancy: Meaning, Criticisms & Real-World Uses

What Is Life Expectancy?

Life expectancy is a statistical measure representing the average number of years an individual is expected to live based on current mortality rates for a given population. It is a fundamental concept within the broader field of financial planning and actuarial science, particularly important for long-term projections. This metric is influenced by a multitude of factors, including age, gender, geographic location, socioeconomic status, and health conditions. Understanding life expectancy is crucial for various financial contexts, such as assessing risk assessment, structuring pension plans, and designing annuities.

History and Origin

The concept of measuring life spans has roots in ancient civilizations, but systematic life expectancy calculations began to emerge in the 17th century. Early pioneers like John Graunt, often considered the founder of demography, analyzed London's Bills of Mortality to estimate survival rates and create rudimentary life tables. These early efforts laid the groundwork for modern mortality tables. Over centuries, with advancements in statistics, public health, and data collection, the methods for calculating life expectancy have become significantly more sophisticated. The World Health Organization (WHO) highlights that global life expectancy increased by over six years between 2000 and 2019, from 66.8 years to 73.1 years, though the COVID-19 pandemic caused a temporary decline, reversing about a decade of gains by 2021.¹⁴

Key Takeaways

Life expectancy is a statistical average of the remaining years a person is expected to live, based on current mortality rates.
It is a critical metric in actuarial science, informing the pricing of insurance products and the funding of retirement benefits.
Life expectancy varies significantly by demographics, including age, gender, and geographic region.
While useful for broad planning, average life expectancy can be misleading for individual financial planning.
The Centers for Disease Control and Prevention (CDC) and the Social Security Administration (SSA) provide official life expectancy data for the United States.¹³,¹²

Formula and Calculation

Life expectancy is calculated using life tables, which compile mortality rates for different age groups within a population. Two primary types of life expectancy are generally discussed: period life expectancy and cohort life expectancy.

Period Life Expectancy considers the mortality rates experienced by a population during a specific, recent period (e.g., a single year). It assumes that these observed mortality rates will continue into the future for all ages.
Cohort Life Expectancy follows a specific group of people (a "cohort") born in the same year throughout their lives, using their actual mortality experience as they age. This method can be more accurate for long-term predictions but requires historical data that may not yet exist for younger cohorts.

The "complete expectation of life" at age (x), denoted as (\overset{\circ}{e}_x), represents the average future lifetime of a person aged (x), including fractional years. It can be conceptually calculated by summing the probabilities of survival for each subsequent year and adding a half-year adjustment for deaths assumed to occur midway through each year.

The generalized formula for the complete expectation of life at age (x) is often expressed as an integral in continuous mortality models:

\overset{\circ}{e}_x = \int_{0}^{\infty} {}_t p_x dt

Where:

(\overset{\circ}{e}_x) is the complete expectation of life at exact age (x).
({}_t p_x) is the probability that a person aged (x) will survive for at least (t) more years.

In practice, actuaries use discrete mortality rates ((q_x), the probability of dying between age (x) and (x+1)) from mortality tables to approximate this integral:

\overset{\circ}{e}_x \approx \sum_{t=0}^{\infty} {}_t p_x + \frac{1}{2}

This summation essentially adds up the probability of surviving to each subsequent year, with the (\frac{1}{2}) accounting for deaths occurring, on average, halfway through each year of age.¹¹ The calculations for life insurance premiums heavily rely on these sophisticated actuarial methods.

Interpreting Life Expectancy

Life expectancy figures provide a valuable snapshot of a population's general health and longevity trends. For instance, a higher life expectancy often indicates better healthcare, living conditions, and public health initiatives within a country. The Centers for Disease Control and Prevention (CDC) reported that in 2022, the average life expectancy at birth in the U.S. was 77.5 years, with females generally having a higher life expectancy than males.¹⁰

However, when interpreting life expectancy for individual financial planning, it is crucial to understand that these figures are averages. A person's actual lifespan may differ significantly from the average due to individual health, lifestyle, genetics, and socioeconomic factors. For example, while the life expectancy for a 65-year-old male might be around 82 years, there's a considerable probability they could live well beyond that, into their 90s or even longer.⁹,⁸ Therefore, relying solely on an average life expectancy for critical investment decisions or setting a retirement end date can be problematic. Financial planners often consider a range of potential outcomes and use tools like Monte Carlo simulation to account for this variability.

Hypothetical Example

Consider Maria, a 65-year-old woman beginning her retirement planning. According to a hypothetical life table, the average life expectancy for a 65-year-old female is 20 additional years, meaning she would be expected to live to age 85.

If Maria based her entire financial plan solely on this average, she might calculate that her savings only need to last until her 85th birthday. She would project her healthcare costs, spending, and income streams for 20 years. However, if Maria is in excellent health and has a family history of longevity, there is a significant chance she could live to 90, 95, or even beyond. If she lives longer than 85, she risks outliving her savings. A more robust plan would consider the probability of living to a greater age, ensuring her resources can sustain her throughout an extended retirement.

Practical Applications

Life expectancy is a cornerstone in numerous practical applications across finance and public policy:

Insurance Underwriting and Pricing: Life insurance companies use life expectancy data and detailed actuarial tables to assess the probability of a policyholder's death at various ages. This determines the risk associated with issuing a policy and directly influences the premiums charged to clients.
Pension and Annuity Design: Defined benefit pension plans and providers of annuities rely heavily on life expectancy projections to calculate their future liabilities and ensure they have sufficient funds to make payments to retirees for their expected lifetimes.
Retirement Income Planning: Individuals and financial advisors utilize life expectancy estimates to determine how long retirement savings need to last. This impacts withdrawal strategies, asset allocation, and overall financial sustainability in retirement. The Social Security Administration provides a publicly accessible life expectancy calculator to help individuals estimate their expected lifespan based on their birthdate and gender.⁷
Government Policy and Social Security: Governments use population-wide life expectancy data to project the sustainability of social welfare programs like Social Security and Medicare, influencing decisions on retirement ages, benefit levels, and funding mechanisms.
Estate Planning: Longer life expectancies can complicate the timing and strategies for wealth transfer and estate planning, as individuals may need to support themselves for a longer period before transferring assets to heirs.

Limitations and Criticisms

While life expectancy is a vital statistical tool, it has several limitations, particularly when applied to individual financial planning. One significant criticism is that average figures can be misleading. As Stephen Lowe of Just Group noted, "Applying average life expectancy figures to retirement planning doesn't work because of the simple fact that individual people are very unlikely to be average."⁶ Fewer than half of 65-year-olds are expected to die within five years either side of their average life expectancy.⁵

Other limitations include:

Future Mortality Improvements: Period life expectancy calculations are based on current mortality rates and do not fully account for future improvements in medicine, healthcare, or lifestyle that could extend lifespans.
Individual Variability: Averages obscure significant variations among individuals. Factors like health, genetics, lifestyle choices (e.g., smoking, diet, exercise), and socioeconomic status can lead to vastly different individual outcomes. For instance, healthy non-smokers may live considerably longer than the average.
Data Lag: Life expectancy data is often compiled with a lag, meaning the most recent figures may not fully capture very recent societal changes or health crises.
Outliving Savings (Longevity Risk): A major risk in retirement planning is outliving one's savings, known as longevity risk. If individuals plan for an average life expectancy and live longer, they could face financial hardship in their later years.
Behavioral Biases: Individuals often underestimate their own life expectancy, leading to inadequate savings and financial preparations for a longer retirement.⁴

Financial advisors mitigate these limitations by using more sophisticated techniques, such as scenario analysis or Monte Carlo simulations, which model a range of possible lifespans rather than a single average.

Life Expectancy vs. Longevity Risk

While closely related, "life expectancy" and "longevity risk" represent distinct concepts in financial planning.

Life Expectancy is a statistical average: the predicted number of years a person, or group of people, is expected to live based on current mortality rates. It provides a central tendency for how long individuals are projected to survive. For example, the CDC provides average life expectancies for different demographics³.

Longevity Risk, on the other hand, is the financial risk that an individual (or a pension fund or insurer) lives longer than expected. It's the risk of outliving one's savings, or for an institution, the risk of having to pay benefits for a longer period than originally anticipated. This risk highlights that while a financial plan might be built around a specific life expectancy, there's always a chance an individual will live significantly longer, requiring more funds than projected. In essence, life expectancy is the prediction, while longevity risk is the uncertainty around that prediction, specifically concerning a longer-than-average life.

FAQs

What factors influence an individual's life expectancy?

An individual's life expectancy is influenced by a combination of factors, including age, gender, genetics, lifestyle choices (e.g., diet, exercise, smoking habits), socioeconomic status, access to quality healthcare, and environmental conditions.

How do actuaries use life expectancy?

Actuaries use life expectancy, often derived from detailed mortality tables, to calculate insurance premiums, determine funding requirements for pension plans, and design various financial products like annuities. They analyze historical death rates to project future probabilities of survival.

Is healthy life expectancy different from overall life expectancy?

Yes, healthy life expectancy (also known as Health-Adjusted Life Expectancy or HALE) refers to the average number of years a person is expected to live in "full health," free from major diseases or disabilities.² Overall life expectancy simply measures the total number of years lived, regardless of health status. Both are important metrics, with HALE providing insight into the quality of those years.

Can I calculate my personal life expectancy?

While you cannot precisely predict your individual lifespan, you can estimate your life expectancy using online tools provided by organizations like the Social Security Administration's Life Expectancy Calculator.¹ These tools use demographic data, and sometimes health and lifestyle inputs, to provide a personalized estimate based on statistical averages. However, it's important to remember these are estimates and not guarantees.

Why is life expectancy important for retirement planning?

Life expectancy is critical for retirement planning because it helps determine how long your savings need to last. Underestimating your potential lifespan can lead to a significant financial shortfall in later retirement years. Financial advisors often plan for scenarios beyond average life expectancy to mitigate longevity risk.