Lapse Supported Pricing

[Deepsea]

While only 5% of people may die significantly before their life expectancy---which very well maybe true.

The truth I believe is that way more policies, make that whole life policies lapse (by definition term policies are designed to lapse).

The percentage of whole policies that lapse ----not pay a death benefit--is rather much larger than what you would think. If you look at the IRR of cash value vs IRR of death benefit.......the IRR of death benefit is always higher.....

Therefore at later ages and especially at younger ages once the insurance company recovers their selling expenses and recovers enough to make a profit....if the coverage then lapses then the insurance company makes a greater profit then they would if the policy was kept by the insured until death to keep the death benefit.

Why do you think that insurance companies don't want policies to be sold in the secondary market ?

Because those policies that are sold in the secondary market to a third party.....are then guaranteed to pay a death benefit.

This is also why a lot of companies left the long term care market-----because those companies lapse assumptions were wrong. They assumed lapse rates would be what life insurance lapse rates were---and they were wrong. Too many people kept paying their premiums and collected benefits.

Google Lapse Supported Pricing Princeton
You may not agree, but it is interesting.

I didn't go to Princeton, so I am not that smart.

 

[scagnt83]

While only 5% of people may die significantly before their life expectancy---which very well maybe true.

The truth I believe is that way more policies, make that whole life policies lapse (by definition term policies are designed to lapse).

The percentage of whole policies that lapse ----not pay a death benefit--is rather much larger than what you would think.

Did you miss the fact that only 3.3% of WL policies lapse? That is a stat from the Society of Actuaries. Those are the people who deal with insurance product pricing for a living.

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If you look at the IRR of cash value vs IRR of death benefit.......the IRR of death benefit is always higher.....

Of course it will be.

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Therefore at later ages and especially at younger ages once the insurance company recovers their selling expenses and recovers enough to make a profit....if the coverage then lapses then the insurance company makes a greater profit then they would if the policy was kept by the insured until death to keep the death benefit.

That is not true at all. The insurance company is not looking for a quick profit. They are looking for long term revenue. They will make 10 times more off of a policy that is held until life expectancy vs. one that is lapsed in the first 5 years.

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This is also why a lot of companies left the long term care market-----because those companies lapse assumptions were wrong. They assumed lapse rates would be what life insurance lapse rates were---and they were wrong. Too many people kept paying their premiums and collected benefits.

The reason LTCI lapse assumption were wrong as because it was a new product with no lapse history to base lapse assumptions on.

Life insurance has over 100 years of history to base lapse assumption on. So it is very well documented... and that documentation is contrary to what you believe.

 

[ATM]

Convert or replace the term with perm. You don't buy life ins to make money. There is always cost.

So the IUL policy I bought 2+ yrs ago that has averaged 11% net return after paying for all policy expenses wasn't a good money maker? BTW, that's based off surrender value.

 

[feeshbone]

I agree. Most people lapse with in a year or two

 

[Deepsea]

First of all 3.9 % of whole life policies lapse in a year !

Not ever.

Life insurance contracts are front loaded....which means that more costs are charged then necessarily to provide the actuarial benefits promised later on.

While later on the money provided the companies is insufficient to provide the benefit to all insured.

The only way to provide the benefit promised by the insurance company is for a large percentage of policies to NEVER pay a death benefit by lapsing first.

Google "Lapse Supported Pricing Princeton" and then you can see what I see.

If premiums paid until death were such a great deal for the insurance companies----then why do you think they lobby to limit the secondary market for life insurance policies ?

From the Princeton Paper.....people underestimate the possibility of a financial and or unemployment shock....which makes them lapse the policy.

Please look at what I am referring to and then make your own conclusions. Very interesting and eye opening paper in my opinion.

 

[scagnt83]

First of all 3.9 % of whole life policies lapse in a year !

Not ever.

I guess you dont believe hard facts. That number comes from the Society of Actuaries.... do you know what an actuary is????

 

[Deepsea]

Scagnt83

Are you saying that for all whole life policies---

Only 3.9 % lapse.

So if 1000 people take out a whole life policy--961 people or rather their beneficiaries will collect a death benefit ??!

I don't know what the number is but it's probably more like 60% to 70% will lapse before death.

scant83......Google a
LIMRA figures on life insurance lapseation.....and then get back to me.

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Btw a lot more whole life by percentage lapse in just the first year---/not sure what the number.....but more like 10% to 12%

 

[scagnt83]

Scagnt83

Are you saying that for all whole life policies---

Only 3.9 % lapse.

So if 1000 people take out a whole life policy--961 people or rather their beneficiaries will collect a death benefit ??!

I don't know what the number is but it's probably more like 60% to 70% will lapse before death.

scant83......Google a
LIMRA figures on life insurance lapseation.....and then get back to me.

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Btw a lot more whole life by percentage lapse in just the first year---/not sure what the number.....but more like 10% to 12%

Go read my original post again. That is a stat from a 2005 joint study by LIMRA & the Society of Actuaries.

The reason LIMRA brough the SoA in on the study is because an Actuary is someone who prices insurance products. They do it for a living and are the foremost experts in life insurance pricing/lapses/rates/etc.

But again, it was a joint study by LIMRA and the SoA. They did it in 2005 and again in 2009.

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB4QFjAA&url=https%3A%2F%2Fwww.soa.org%2FFiles%2FResearch%2FExp-Study%2FUS-Indiv-Life-Persistency-Report-FINAL.pdf&ei=_NIAVMSNCc_HgwS-1IDQCw&usg=AFQjCNFIAMB2_Y_7SGk4Jos_Gc0PDOd7wg&sig2=cCu4HHab604TFKL6y9GW8A&bvm=bv.74115972,d.eXY


So there is your LIMRA study.

But you are correct that for policies under $100k and for SI/GI policies the first year lapse rate is 12% for GI and 21% for SI.
But a fully underwritten policy is about 8% for the first year. Then it lowers down to 3% range by year 3.

The chart shows that the longer someone has a policy the more likely they are to keep it, so lapse rates decrease with policy age.

Read the study. It is one of the most comprehensive studies done about Life Insurance Persistency.

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Google "Lapse Supported Pricing Princeton" and then you can see what I see.

Ok. I did.

This is quoting directly from that Princeton study:

"About 4.2% of all life insurance policies lapse each year,
representing about 5.2% of the face value actually insured (“in force”)"

And that is including Term.

By the way, they are basing a good bit of that "study" on the exact same LIMRA/SoA study that I was talking about....!!!
(which by that study is more of a summation of one mans opinion vs. an actual study imo after reading some of it)

 

[Deepsea]

Whole life lapses less than term---we hopefully can agree on that. Term is designed to lapse....that is expire before a death benefit is paid.

But even just whole life has a higher lapse rate then most people----even agents know.

Life insurance companies anticipate a certain % of policies will lapse without ever paying a death benefit.

Their economic model is based on this fact----which is why they object so strongly to the secondary market----as those policies will most certainly not lapse----and this event interferes with how many policies will lapse without the insurance company paying a death benefit.

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I just checked that LIMRA SOA study and you were right about the 3.9%.....but it's not 3.9 of all polices during the insured's life....

It's 3.9% a year !

So keep your policy till death------ it pays to do so

 

[scagnt83]

I just checked that LIMRA SOA study and you were right about the 3.9%.....but it's not 3.9 of all polices during the insured's life....

It's 3.9% a year !

Of course it is.... 3.9% of all WL policies currently in force will lapse this year due to various reasons. That is not a large number, especially considering the higher first year lapse rates.


Another interesting statistic is that around 1.2% pay out a DB each year. Compared to a national death rate of 0.95% per year.


And 3.9% per year, would be the same as 3.9% during the insureds life (assuming the lapse rate remains constant). That would be a linear figure. (unless you mean the % of policies the insured owns...?)