Whole Life Insurance Lapse Rates

If you spend anytime around a traditional life insurance agent/broker discussing which type of life insurance you should own, then you’ve undoubtedly been told to opt for whole (or universal) life over term life insurance. And one of the most commonly used statistics to build the case for owning permanent life insurance over term life insurance is the fact that less than 1% of term life insurance policies ever pay a claim.

Sounds like a waste of money to pay all those premiums to an insurance company knowing there’s a 99% probability that your policy will expire before you do…right?

In fact, the old follow-up point to presenting this statistic to a prospect was to note somewhat glibly, “of course it’s so cheap, when you design a product to almost never work you can pretty much give it away.”

No manipulation in that statement at all (can you feel me rolling my eyes?).

So much time is spent focusing on the slim odds of a death benefit payout probability that most people forget to ask the naturally obvious follow up question:

What percentage of whole life insurance policies pay a claim?

This statistic isn’t widely quoted by life insurance agents, and I’ll propose a theory later on that might shock a few people.

So what’s the answer? A lot lower than you might imagine.

The Magic Number is…

First let me tell you that the percentage of whole life policies that pay a claim is a little tricky to land on. There is some very complex actuarial minutia that would be required to adequately dive into this topic, but since that requires a whole lot of technical discussion, we’ll skip it.

The big takeaway is simply that companies design permanent life insurance products differently. This variance of product design will create changes in the length of time any one company actually wants the product to remain in force relative to another and this fact can influence policy lapses.

Still, a broad percentage at least offers some insight into the fairness behind the juxtaposition of term life insurance to whole life insurance, so simply knowing the percentage of policies that wind up paying a claim is useful, and that answer is somewhere between 15 and 20% for whole life insurance.

surprise

So Much for Lasting your Whole Life

Like any statistic this one can be used for bad or good.

And there are those who will definitely highlight this stat to suggest pretty much the exact same thing life insurance salesman are doing when they quote the well-known 1% term statistic (i.e. small probability of payout, you should opt for something else).

I would argue, however, that there’s a lot more to these statistics and note that neither one is all that useful and should ultimately be ignored forever.

Let’s Talk about the Source

Another question that is reasonable to ask here is where this information comes from. If you want my direct source for the whole life payout rate, I’m sorry to say I’m going to seriously disappoint you. This information was given to me a few years ago by an actuary. I can’t disclose his identity as this sort of information teeters on the proprietary ledge that they get really nervous about.

Not to worry–allow me to bring up another point that should render both statistics utterly useless.

Claims experience on any product is proprietary information. Insurers can use it to price products (but not reserve them unless or until Principle Based Reserves become the standard) so long as they can prove that they have a sufficient amount of experience with the product—this is generally defined as a few years experience in issuing the product.

The protection of this information from competitors is a serious affair—and agents think the restrictive covenants they sign onto are burdensome—where violation of keeping this information from public eyes comes with serious consequences.

So it seems odd then, that the term payout rate would be so ubiquitous but information on other forms of insurance would be virtually non-existent?

I had to dig for quite some time to get the information I have, and I’d invite any of you to try your hand ay unearthing these statistics yourself. Why do they make it so difficult?

Could it be that permanent life insurance products vary too much to get a clear picture?

This seems like an obvious and acceptable answer on its face, but knowing what I know about the experience data available to actuaries (so that they might accurately price products) this seems unlikely to be the real reason.

If insurers can parse the data well enough to convince Insurance Commissioners that they have sufficient data to price a product on a selected mortality assumption then surely they could muster up the precise details to answer our question.

Maybe instead the reason the term statistic is so widely available is because insurers want it that way?

tin foil hat

There’s no evidence to substantiate such a claim but we suspect it may be true nonetheless. It could very well be that insurance companies would like for you to think term insurance is not a great deal.

Why is that?

Because whole life insurance is very profitable for them. Now, that’s not to say term insurance isn’t, but the profitability of term insurance is largely dependent upon scale. If a company is willing to scale up and write boatloads of term insurance, it can be wildly profitable.

If an insured who purchases a whole life insurance policy lives to life expectancy, the insurer will do quite well inspite of having to pay a death benefit.

Please keep in mind…we like whole life insurance.

In fact, we spend the majority of our working hours talking about it, illustrating it, and deconstructing it for our clients. I’m just trying to point out that maybe all the statistics floating about have more of a psychological marketing intent than any basis in reality.  Here’s what I’m pretty certain is true.  100% of all whole life policies that remain in force through an insured’s life <em>will</em> pay a death benefit.  And in addition to that, 100% of term policies issued will pay a death benefit <em>if</em> the insured dies while the policy is in force <strong>and</strong> 100% of term policies provide an astronomical amount of peace of mind for the insured in knowing that if he or she dies his or her loved ones have a safety net in place to recover that individuals lost productivity (i.e. buying power).

Evaluate your policy or future purchase of a policy based on your need and what you’re trying to achieve, not on statistics. The only statistic that’s likely to matter is how YOUR policy performs for you.  Even a by-the-numbers guy like myself understands that statistics talk generally about everyone but specifically about no one.  And making purchasing decisions about life insurance based on these statistics is like


5 Responses to “Whole Life Insurance Lapse Rates”

  1. Mark Harvey says:

    Really good article Brandon. I have been an agent for 23 years and was trying to find out % of permanent policies that get kept and end up paying out a death claim. It’s so easy to find the “term equivalent” answer – “less than 2%.” I think you are saying 15% – 20% of permanent policies get kept and pay out a claim … based on a secret actuarial source. Correct?

  2. No One Wears a Bulletproof Vest Hoping to Get Shot - Mom and Dad Money, LLC says:

    […] but about 30% of all whole life insurance policies lapse within the first three years alone. Another source finds that only 15-20% of whole life insurance policies ever pay out at all. That’s a far cry […]

  3. David How says:

    I submit that life insurance is ruled by lapse based pricing.

    You win when a death benefit is paid out.
    The insurance company wins when no death be benefit is paid.

    Therefore those that keep a policy Inforce until death get a great deal from the insurance company.

    While the insurance company gets a great deal from those policies that lapse.

    • Brandon Roberts says:

      Hi David,

      It’s quite a bit more complicated than that, and an insurer can make out quite well even if a whole life or universal life policy is held for a long long time. Lapse “based” (or lapse supported) pricing/design generally only applies to policies without a non-forfeiture benefit (i.e. Term, GUL, Disability, and Long Term Care insurance).

Leave a Reply