Legal Definitions - risk factor

Risk factor, in the context of life insurance, refers to an insurer's estimate of the potential financial cost of paying out future claims to policyholders. This calculation is primarily based on statistical data, such as mortality tables, which predict life expectancy across different demographic groups. Essentially, it quantifies the financial risk an insurer assumes when issuing a policy, directly influencing the premium rates policyholders are charged.

• Example 1: A 30-year-old non-smoker with no significant health issues applies for a life insurance policy. Based on actuarial tables, individuals in this demographic typically have a long life expectancy. The insurer would assign a relatively low risk factor to this applicant because the estimated cost of paying out a claim is projected to be far in the future, making the immediate financial risk to the insurer lower.

• Example 2: A 65-year-old individual with a history of heart disease seeks life insurance. Statistical data indicates that people in this age group, especially with pre-existing conditions, have a higher probability of passing away sooner than younger, healthier individuals. The insurer would therefore assign a significantly higher risk factor, reflecting the increased likelihood and potentially earlier timing of a claim payout, which translates to a higher estimated cost for the insurer.

• Example 3: A professional stunt performer applies for life insurance. While they might be young and in excellent health, their occupation inherently involves a higher risk of accidental death compared to the general population. The insurer's statistical models would incorporate this occupational hazard, leading to a higher risk factor being assigned. This higher factor accounts for the elevated probability of an early claim due to the nature of their work, increasing the estimated future cost for the insurer.