Actuarial Equity

Ever wonder what those geniuses in your math class do when they grow up? Some become insurance actuaries, who stare into their crystal balls and then decide what price to recommend you pay for a given type of life insurance policy. They determine what is called actuarial equity by applying a magical incantation, which requires the mumbling of stats formulas, Greek letters, and other mathy things. These calculations spit out guidance on how to price a given life insurance policy. Actuarial equity makes sure the insurance company makes money—a rather important principle for a successful business. Think of equity in this sense as a kind of kissing cousin to retained equity on a normal corporate balance sheet. It's basically saved and retained earnings from taking life insurance policy risk.

Here's how it works: You have individuals who depend on your income—children, spouses, pet hamsters. You realize that if your inevitable death happens before you build an empire, your dependents will need a financial bra…aka financial support…and chances are good that random strangers aren't lining up to provide financial support for your loved ones. You, therefore, buy life insurance, so if your inevitable death becomes an untimely one, the insurance company will take care of your dependents financially.

In order to determine how much to charge you, so they can both make money and take care of your loved ones, insurance actuaries combine factors such as age, health, habits, and whether you enjoy antagonizing professional wrestlers and pitbulls while skydiving without a backup parachute. The higher your risk of an untimely death, the more the insurance company charges you.