Could you guess your lifespan for £100,000?

Mark Churchill 04 November 2015

Could you accurately guess how long you'll live, if a large sum of money depended on it?

Given that hundreds of thousands of pounds could be riding on the answer, you'd hope most people would be pretty good at this type of estimation.

Unfortunately, research indicates that we really aren't.

Most people make two (potentially costly) mistakes:

Let's take a look at what the data says, why our estimates tend to be off, and what it could cost us if we get it wrong.

And of course, what we can do about it.

During working life: we think we're invincible

I'm going to use myself as an example.

I am a 39 year old man. I'll reach my State Pension Age (67) in 2042. According to the latest life expectancy data, I have an 84.6% chance of living to that age.

At first that sounds like a decent number. But after a moment it becomes sobering to think that, despite being in good health and living in an advanced economy in the 21st Century, there's a 15.4% chance I won't make it to my anticipated retirement date.

In other words:

During the time my mortgage and my family are financially dependent on my income, there's roughly a 1 in 6.5 chance I'll leave them behind.

The figures are different for men and women. A 32-year old woman, with a State Pension Age of 68, has a 1 in 10 (10.2%) chance of not making it.

This is all based on figures from the Office of National Statistics (if you want, you can download the summary data tables here). It's detailed, fascinating, occasionally scary stuff.

These are statistical averages for the UK, so there are millions of others facing the same odds as me.

And yet despite this, so few of us have life cover.

Research from AA Insurance found that 35-44 year olds are the most likely to have both children under 18 (60%) and a mortgage (59%). Although they have the greatest need, only 43% of people in this age group have any life insurance.

People in their 40s and 50s are the most likely to have cover – but that's still only 57% of them.

So why are around half of people my age gambling with their families' financial security?

As a man in the middle of my working life, I'm certainly guilty of feeling invincible. The thought of exiting stage left hasn't really crossed my mind until now, and I doubt many of us want to think about it.

Nevertheless, those odds are hard to ignore. To recap, there's a 1 in 6.5 chance that my family would be left without my salary unexpectedly. That would leave a big financial gap at a time of immense strain.

So far, so sobering.

The good news is that when you're still working age and in good health, you can afford a surprisingly high amount of life cover.

When I ran a quote just now, a payout of £200,000 to cover my family up to my retirement date costs from as little as £17.28 per month for life cover only – and an extra £9.04 per month to pay out an equal amount if I end up with a critical illness, too:

This quote is based on £200,000 worth of level term cover, over 28 years, for a 39-year-old non-smoker.

Click here to get a quote like this.

And if you're not sure whether you should insure your stay-at-home partner too, read this.

Bonus tip: make sure to say yes to putting your life insurance policy in trust. It protects your dependents from a possible inheritance tax burden and helps them get the money they need more quickly.

Approaching retirement: we underestimate our longevity

In contrast to our reckless optimism during working life, something happens when we contemplate our post-work years. Recent research from Zurich has found that two-thirds of us underestimate our longevity when it comes to retirement planning.

In other words, two-thirds of people are likely to outlive their savings.

When asked, over half (51%) of future and current retirees believed they would be retired for 20 years or fewer. Most people (68%) also predicted they would live to be 85 or younger.

But figures from the ONS suggest that half of people retiring now could live to 90 or beyond, meaning that their pension pots will need to last longer than planned.

The government recognises this; it's part of the reasoning behind the new auto-enrolment legislation, which means that most of us should now have a workplace pension.

Saving enough for retirement?

Check whether your contributions are keeping you on course with our pension pot calculator.

To understand this, we need to look at period life expectancy. This is the average number of years that people of a given age will live thereafter, based on 2012-14 mortality rates. So if you're 50 and have a period life expectancy of 20, that means you're predicted to live until the age of 70.

Let's use me as the example again. A 39 year old man has a period life expectancy of 41.35 – meaning I should live until I'm just over 80.

However, a male aged 67 today has a period life expectancy of 16.87 – meaning he can expect to live until he's 84. Four years longer than my estimate.

So what's happening here? Why is someone born in the 1940s predicted to live longer than I will?

The point is that your life expectancy at birth takes into account ALL the risks you face during your life. If you've made it to 80, you've already beaten many of them.

Yes, this means that statistically speaking, the goalposts are constantly on the move. Your life expectancy increases as you get older, and your risk of being financially unprepared for old age catches up with you.

The best thing you can do to mitigate this risk is to be prepared. First, it is never too early to start saving for retirement. Second, even if you've made a good start, you should regularly check up on your pension fund to make sure it's going to meet your needs. And if you're unsure about the best way to save for retirement, it's worth taking financial advice.

What to do next

I hope all this talk of the fragility of life has not been too discouraging and, rather, that it's motivated you to act.

There are simple steps you can take now to make sure that:

  • You and your family are covered during the period when your responsibilities peak
  • A long life doesn't mean a struggle in retirement

Step 1:
Start saving into a pension if you haven't already. Your employer should offer you one, and you can pay in as much or as little as you like. Contact an adviser if you're not sure what's best for you.

Step 2:
If you already have a pension, review it regularly. Make sure you're still on track to have enough using our pension pot calculator.

Step 3:
Get prices from different life insurance providers, and take out a policy that will give you the cover you need. Our comparison tool makes it easy to weigh up your options and compare prices on screen. This question will get you started:

Compare life insurance prices