According to a recent study done by Global News, Ontarians who live in poor areas are more likely to die at an earlier age compared to Ontarians who live in affluent areas.
The study was done by dividing Ontario into separate sections through postal codes. Each postal code area’s median income was then taken from Statistics Canada.
Finally, this data was cross-referenced with Ontario death certificates. Deaths for those under the age of 18 and the age of 50 were tracked from 2004 to 2012.
This study found that Ontarians living in poorer postal codes were more likely to die young while people in wealthier postal codes were more likely to have a longer lifespan.
While the study didn’t actually explain why living in a richer postal code results in a longer life span, some of the obvious factors that can lead to this result include having access to better medical care, less crime and living in a cleaner environment.
The results from this study raise some important questions. Should life insurance premiums be lower for wealthier people? Moreover, should life insurance companies charge policyholders premiums based on their postal code?
Looking for answers to these questions requires us to weigh the importance of data versus ethics.
On one side, data tells us that people living in a wealthy neighborhood have longer life spans. For any life insurance company, people with longer life spans are ideal customers. They continue to pay annual premiums until old age and often don’t require an early policy payout.
Therefore, the life insurance company is more likely to break even or turn a profit by insuring wealthier people.
People who die at a younger age obviously don’t pay as much total premiums as people who live for a longer period of time. This means that the life insurance company is more likely to take a loss by insuring people with shorter life spans.
So, if wealthier people are proven to have longer life spans and pay premiums for a longer period of time, it does make sense from a numerical standpoint to charge them lower a lower cost of insurance.
Also, if people with healthy and safe lifestyles pay lower premiums, then it also makes sense for wealthier people with longer life spans to be included in that same category.
However, this is where we have to look at the other side of the argument by analyzing the situation from an ethical point of view.
By charging wealthier people lower premiums, life insurance companies would likely begin to charge low income earners higher premiums for the exact same product.
Considering that a life insurance policy is already a big-ticket purchase and can often be tough to afford for many people, this could easily be considered as ethically wrong.
It can also be argued that low income earners need life insurance more than wealthy people do. Low income families rely more on a life insurance policy payout if their breadwinner unexpectedly passes away. Wealthier families usually find it easier to absorb a loss of a breadwinner at a financial level.
Another point worth noting is that wealthy policyholders already pay a low cost of insurance in many cases.
This is due to the process of insurance carriers structuring pricing levels, also known as rate banding. The concept is similar to buying goods in bulk; the more you buy at one time, the less you pay per unit.
Insurance companies will calculate premiums based on a rate per $1,000 of coverage. As the total face amount of the policy goes up, the rate per $1,000 goes down.
High net worth individuals typically benefit from rate banding since policies with face amounts over $1,000,000 are not uncommon.
It is difficult to say whether or not life insurance actuaries should factor in the relationship between mortality and wealth. It’s okay to differentiate between the genders and smoking statuses, so why not income level, net worth or postal code?
At the end of the day, any answer to this question will have to also weigh the importance of both data and ethics in order to reach a fair resolution.
Where do you stand in this debate? Let us know by leaving a comment below.
