What is an Actuarial Table?
Comic from XKCD
The short description of an Actuarial tables would be that they are tables for calculating the probability that someone of a given age will die within a given amount of time. Other names may include life expectancy Tables, mortality tables or the more morbid death chart.
There are two types of life tables:
- Period or static life tables: the current probability of death (for people of different ages, in the current year)
- Cohort life tables: the probability of death of people from a given cohort (especially birth year) over the course of their lifetime.
Why are Actuarial Tables Used?
A strong representation of human mortality would give
a sense of the rate of death occurring at specified ages over specified periods of time. Insurance companies will use actuarial life tables to help price out products. Due to the explosion of data recently actuarial life tables can also factor in different variable risks such as smoking, occupation, socio-economic status and debt.
In fact Section 7520 of the Internal Revenue Code requires the use of a set of actuarial tables for valuing annuities, life estates, remainders, and reversions, for all purposes under Title 26 except for certain purposes stated in the statute or provided by regulation. The Social Security Administration uses Actuarial tables to evaluate the actuarial soundness of annuities, promissory notes, loans and mortgages. Pension Actuaries will regularly take into account these tables when planning out accounts.Source: sixoverten.com