Lapse Supported Pricing

[Deepsea]

No. On average it's 3.9% each year
Year 1.....96 out 100
Year 2......93 out 100
Year 3......90 out 100
Year 4......87 out of 100
Year 5 .....84 out of 100
Year 6..,...81 out of 100
Year 7......78 out of 100 left
Year 8......75 out of 100 left
Year 9......71 out of 100 left
Year 10....68 out of 100 left

So just at year 10 only 68% of policies are still in force

At year 20 about 45%

At year 30 maybe 35%

So after 30 years of age only 35% of policies bought 30 years before are still in force.

These numbers aren't exact......and I just took approx 3.9% less each year in my head....but you get the idea

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Of course a certain % of these policies will pay a death benefit like you said.

And if your number is right of 1.2% a year and not sure if it is.......then you would still have a net lapse rate of 2.7% every year.

So at year 30 only 44% are still in force.

It's probably less

 

[scagnt83]

No. On average it's 3.9% each year
Year 1.....96 out 100
Year 2......93 out 100
Year 3......90 out 100
Year 4......87 out of 100
Year 5 .....84 out of 100
Year 6..,...81 out of 100
Year 7......78 out of 100 left
Year 8......75 out of 100 left
Year 9......71 out of 100 left
Year 10....68 out of 100 left

So just at year 10 only 68% of policies are still in force

At year 20 about 45%

At year 30 maybe 35%

So after 30 years of age only 35% of policies bought 30 years before are still in force.

These numbers aren't exact......and I just took approx 3.9% less each year in my head....but you get the idea

That is not how it is calculated or applied. The 3.9% is a rolling average. It also includes new policies which depending on the type have as high as a 12% first year lapse rate.

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And if your number is right of 1.2% a year and not sure if it is.......then you would still have a net lapse rate of 2.7% every year.

That stat was from the same study.

 

[Deepsea]

So what percent of whole policies ever pay a death benefit ?

 

[rousemark]

So what percent of whole policies ever pay a death benefit ?

100% of those that remain in force following the contestable period.

 

[feeshbone]

That's good facts. I see it in my own business just over the past 5 years. seems like every quarter I have 1 to 3 people lapse.

 

[BNTRS]

That report is from Wharton not Princeton.

The profit model on term insurance (which is what that report mostly speaks to) is different from other products, and lets not lose sight of the fact that insurers often have very diverse businesses with several profit centers.

There is a war going on that is confusing semantics regarding a "lapse." The official definition is generally a policy that is terminated without a cash value, so if a whole life or universal life policy does not terminate in the first few years it will never lapse, but it will be surrendered.

The percentage of permanent policies that pay a death claim is a closely guarded "proprietary" secret. I was told it's around 20%. Keep in mind, however, that policies surrendered have a cash value and are often surrendered for some other benefit (e.g. cash out, 1035 to an annuity, 1035 to a different life policy, etc).

Again, most permanent products (GUL is a bit of a wild card) are designed to be profitable if held to death, but this doesn't mean they are sometimes more profitable if a surrender occurs sooner. However, it's not nearly as substantial as some have suggested here.

 

[Deepsea]

Very true about about policies that lapse still have value a cash value.

The death benefit return is always greater than the cash value. The cash value approaches the death benefit more and more the older you get.

I collected a death benefit on my parents and my kids will collect a death benefit on me.
If I die before my wife she will get the death benefit, and she dies before me I will collect the death benefit.

In the early years insurance is expensive for what you get.
In the later years it's a great deal.

Assuming that you don't die anytime soon.

If you die with term Inforce you made a great financial move, but of course you're now dead.

Keep that whole life policy till her end and you win.

The lapse supported Princeton report was very interesting once again----by saying that people speculate and the insurance company speculates , but the insurance company knows the numbers better. People underestimate the chance of financial shocks and other things which makes them not keep the life insurance in force and makes them lapse the policy.

I'm keeping mine until I die.

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The 20% figure seems dead on (no pun intended).

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Btw it's Princeton.edu
The Wharton study you speak of must be another.

Google lapse supported pricing Princeton-----and if it's Princeton.edu then it's the same----if not then we are talking about two different studies.

 

[BNTRS]

It's a Wharton paper. It's served at the Princeton site because the authors presented their work at Princeton. They are Wharton professors.

 

[Deepsea]

Ok. But it said Princeton---
Princeton---Wharton whatever.

Glad we saw the same thing.
I thought it was very interesting, and said what I strongly believe---if you want a death benefit buy whole life, and if you want the best deal have it Inforce when you die.

 

[scagnt83]

In the early years insurance is expensive for what you get.
In the later years it's a great deal.

That is not mathematically true. The RoR for the DB is on a declining scale.

First year RoR for the average Par WL policy is anywhere from a 1000%-5000% return on your premium.
The second year it drops considerably down to the 500% range.
But if you keep it until life expectancy, the RoR is usually around 3%-5%.

You will never have a better return on your money than the protection a life policy gives you in the first 5 years. That is a mathematical fact.

I would encourage you to run some WL illustrations and look at the RoR page of them.

It seems you are getting caught up in the fees and expenses that are "front loaded"; but you are not paying attention to what matters.... and that is the benefit given to you in exchange for that. The inbetween does not really matter that much, what matters is what you are giving vs. what you are getting.


(of course the CV RoR is inverse the DB RoR)