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.


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 at 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?


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 will pay a death benefit.  And in addition to that, 100% of term policies issued will pay a death benefit if the insured dies while the policy is in force and 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

13 thoughts on “Whole Life Insurance Lapse Rates”

  1. 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. 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.

    • 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).

  3. Brandon,
    Great read! I’m doing research for a paper I need to present and I’ve been looking for this number as well. This is a great start and helps me to understand how much actually goes to claim. I do have another question for you.
    Do you happen to know how much inforce Life Insurance is floating around in the US right now? How much death benefit is out there to collect on if insurance companies had to pay out everything? I am very curious. Hope I can get an email back! Thanks.

    • Hi Jeremy,

      I don’t know how much exists outstanding, but you might find an answer by going to the NAIC or LIMRA.

  4. For Jeremy, all US servicemen are eligible for SGLI a group insurance plan covering up to $400,000 dollars in benefits at a rate of $25.00 per month.

  5. Hi Brandon,
    Wouldn’t it be correct to state that 100% of Whole Life policies will pay a claim where premium payments have been kept current (not necessarily UL policies) and where the policy has not been cancelled, and where the insurance company was notified of a death certificate?
    With a Term policy, the client can pay all premiums as they become due, but once the Term time frame expires, 0% pay a claim.
    Wouldn’t that be a more accurate comparison?
    I’m not saying that Term Insurance is not a good value in certain circumstances (like protecting a mortgage for the beneficiary). You obviously also can get a much greater face value on a Term policy for a fraction of the monthly premium.

    • Hi Steve,

      Yes that statement (about whole life insurance) is correct. The point of this article was to shed some light on what the actual claims rate was for people who bought whole life (i.e. how many policies actually ended up paying a claim).

  6. Brandon,
    In this look at lapsed policies was the rate of cashed out youth policies by kids who just wanted money for their first car looked at and how about the surviving spouse cashing out their policy because they had one on each other?
    I’m an agent and I get calls from 25 year-olds cashing out the paid up policy their grandfather bought them because they have no idea that they have they just want the money.

    • I don’t know the exact breakdown of the statistic, it was given to me years ago by someone who worked as an actuary for a life insurance company. I would assume that it includes all possible insured and situations across a block of business.

  7. I have been looking for some stats on payout for whole life and found this blog helpful. Even though I am looking for data, I am also cautious about what it could imply. We can crunch a bunch of numbers and calculate average and standard deviations and it could still not add any meaningful interpretation. There are many reasons for a policy lapsing and I wont be surprised if the primary reasons are inappropriate design and/or policy mismanagement due to lack of understanding. Based on your experience, do you see overfunded policies lapsing? There could be a wide variety of reasons for a lapse and if there is any data to indicate that most of the lapse is because of a bad design or mismanagement of policy, then those statistics can change and paint a completely different picture. I got a policy on my wife few years back and was not even aware of overfunded designs. My agent also did not tell me anything. In hindsight, the policy design is sub-optimal and there is not much I can do at this point and have decided to keep it as is. From what I have read, discussed with others, and understood, most folks are not even aware of a reduced paid up benefit and they tend to follow the original premium schedule that was outlined when they took a policy long time back. So if someone does not want to make a premium payment after 20 years and they take a pay to age 100 policy, off setting premium can eventually cause policy to lapse. Also, if someone takes income out of policy, surrenders, or exercises accelerated benefit rider, are those scenarios considered as a lapse by the insurance company? If they are included in determining lapse % or excluded from determining payout, then it skews the data negatively. I think in that case we should measure a success ratio as opposed to lapse or payout ratio. Key question to consider would be what percent of policies issued met the client’s objectives? This may be difficult for the insurance company to determine because they only measure lapse ratio because it is to their benefit. My cpa recently came across a situation where another client of the cpa’s firm took loans for business and policy lapsed. Such situations can cause the payout ratio to be lower even though the client may have done it intentionally. Either way, I agree that looking at payout ratios for term or permanent life insurance may not necessarily mean that something is good or bad.

    • Pure speculation on my part, but you prefaced your question with “based on your experience” my guess would be overfunded policies probably lapse less frequently driven by the fact that most people who choose to buy whole life insurance this way have a deeper understanding of the product and what they are doing when they buy it. That may be an extremely optimistic view on the situation as there are likely people buying whole life that meets–more or less–the definition of over-funded life insurance but do it because they were dragged through some exotic sales process that told them it was the cure to all their ills. How large a share of the marketplace those sales represent is certainly unknown to me. There’s a chance some insurance companies might have data that at least allows them to somewhat intelligently speculate. But if they do have that data. They’ll never share it.


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