What Is The True Percentage Of Term Policies That Pay Out?

[djs]

2% of policies CANNOT pay out, the math doesn't work, even if you assume 100% stay on the books.

Some generalizations are needed, but lets figure it out.
Lets assume $1M DB, $1000/yr premium. If you figure age brackets, this could go up or down, but then, so does the payout number.

So, you now have to have 1000 people paying $1000 a year to pay a single $1M death claim, if you assume agents work for nothing and the office gets free rent. Lets go with that for a moment.

Now, if you had 1000 policies in force, 2% would be 20 deaths. Ooops, simply doesn't work.

But, you quickly say, its 2% over the life of the term, which I have no idea what that average is, but lets assume 20 year term, on average (no way is it this high).

That would mean out of those 1000 policies that stay on the books for 20 years, paying premiums, you could pay 20 death claims (2%), no agents, no building costs, no employees and break even.

Does anyone really think a life company doesn't make money and doesn't pay the agents? No way does 2% of term policies pay a death claim.

Okay, you can muck with the numbers a bit and maybe, just maybe, come up with a way to make this work, if you assume the premium is higher, death benefits lower, retention is better, terms are longer, whatever. You have to look at averages, not best cases (or worse).

Dan

 

[hazenyc]

The Penn State study done back in the 80s said that less than 2% of all term policies paid a death claim and that less than 10% (I think) stayed in force for the duration of the initial term period.

I've tried looking for this study, and for its supposed author (Arthut L. Miller, associate professor of insurance at Penn State). This study, supposedly, was written in 1963 or 1964 not the 80s.
But more likely it was never written at all. I called Penn State asking them to search their records for Professor Miller, since I wanted this study to show to clients of mine. No record of him, nor have they ever had an 'associate professor of insurance' ever.

 

[WinoBlues]

I've tried looking for this study, and for its supposed author (Arthut L. Miller, associate professor of insurance at Penn State). This study, supposedly, was written in 1963 or 1964 not the 80s.
But more likely it was never written at all. I called Penn State asking them to search their records for Professor Miller, since I wanted this study to show to clients of mine. No record of him, nor have they ever had an 'associate professor of insurance' ever.

Just curious why you would put so much effort on a 1960s study? 1963 and 2013 are apples and Ipads.

 

[hazenyc]

Just curious why you would put so much effort on a 1960s study? 1963 and 2013 are apples and Ipads.

well the first time i found mention of it was a 1993 study then 80s, then 60s. Basically this study never existed. It never happened. And yet it is referenced in any question regarding this 1-2% of all term policies pay a death benefit!

And if anything, insurers are even more capable of underwriting risk now 60 years later (due to technology and more data available) so it would infer that if it was 2% in 1963 it could be 0.2% now!

 

[WinoBlues]

well the first time i found mention of it was a 1993 study then 80s, then 60s. Basically this study never existed. It never happened. And yet it is referenced in any question regarding this 1-2% of all term policies pay a death benefit!

And if anything, insurers are even more capable of underwriting risk now 60 years later (due to technology and more data available) so it would infer that if it was 2% in 1963 it could be 0.2% now!

Even if it was 1993, it would have zero relevance today. IMHO. Especially for an Insurance agent.

Not arguing, just curios.

 

[rousemark]

2% of policies CANNOT pay out, the math doesn't work, even if you assume 100% stay on the books.

Some generalizations are needed, but lets figure it out.
Lets assume $1M DB, $1000/yr premium. If you figure age brackets, this could go up or down, but then, so does the payout number.

So, you now have to have 1000 people paying $1000 a year to pay a single $1M death claim, if you assume agents work for nothing and the office gets free rent. Lets go with that for a moment.

Now, if you had 1000 policies in force, 2% would be 20 deaths. Ooops, simply doesn't work.

But, you quickly say, its 2% over the life of the term, which I have no idea what that average is, but lets assume 20 year term, on average (no way is it this high).

That would mean out of those 1000 policies that stay on the books for 20 years, paying premiums, you could pay 20 death claims (2%), no agents, no building costs, no employees and break even.

Does anyone really think a life company doesn't make money and doesn't pay the agents? No way does 2% of term policies pay a death claim.

Okay, you can muck with the numbers a bit and maybe, just maybe, come up with a way to make this work, if you assume the premium is higher, death benefits lower, retention is better, terms are longer, whatever. You have to look at averages, not best cases (or worse).

Dan

A lot of companies make money without having an underwriting gain. In fact, some even have underwriting losses. They make money on thier investment portfolio which you did not take into account.

 

[indexedannuity_girl]

This information comes from experience studies that actuaries use in their pricing of term policies; not something you can readily access on the web.

FYI- insurers have to sell a heck of a lot of term to be profitable selling the product line in and of itself. It is not a big money maker for insurers. ;-)
sjm

 

[moonlightandmargaritas]

I called Penn State asking them to search their records for Professor Miller, since I wanted this study to show to clients of mine. No record of him...

Maybe he was taking a shower with Jerry Sandusky...

 

[scagnt83]

Every Insurer out there knows what percentage their term policies pay out. Especially the really old companies that have been around forever. Its just that some publish it and some dont.

NYL used to publish a marketing piece that was geared towards converting term policies/selling WL; they used their 100+ years of stats and showed a 2% rate of payout.
But I would guess that NYL has a slightly lower rate than a major term player such as Trans/Banner/Pru/Met/etc.



The study is irrelevant.
Term Insurance serves a need.
It is not about the chance of payout. It is about the chance of your loved ones survival and comfort of living, if there is no life insurance payout to be had.

And by design, Term is not meant to be in-force in very old age.


According to LFGs Life Expectancy tables, a 50 year old has a 0.05% Probability of Death. It does not reach 2% until age 61.... by age 65 it has doubled to 4%... about the time that many Term Policies start to get very pricey...

Most people dont keep Term past age 65 or 70. They either drop it or the policy gets used.
So according to the mortality tables, 2% is about what you would expect from logical reasoning.