Whole Life Insurance Lapse Rate | TigerDroppings.com

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Stingray
LSU Fan
Shreveport
Member since Sep 2007
5174 posts

Whole Life Insurance Lapse Rate



I have been looking into Whole Life Insurance as this is what an agent is trying to sell me. I have been researching it and it is steadily losing the lusher I once thought it had. I feel like my money is better served in other areas like Term Life plus other investments that traditionally see a higher return. I have no particular need for a huge death benefit (when I am old) at this time.

The following, if true, would be the fact that confirms that I will NOT make this Whole Life purchase.

I was reading the White Coat Investor and he linked this LIMRA and Society of Actuaries study:

LINK

On page 19, it states that the annual rate of Whole Life lapsing is at 4%, which would mean about 80% of investors never see the death benefit. This would mean that 80% see a bad return on their investment.

Do people here doubt the accuracy of this study, or draw a conclusion counter to mine?







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GoCrazyAuburn
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Member since Feb 2010
15632 posts

re: Whole Life Insurance Lapse Rate


quote:

I have been looking into Whole Life Insurance as this is what an agent is trying to sell me. I have been researching it and it is steadily losing the lusher I once thought it had. I feel like my money is better served in other areas like Term Life plus other investments that traditionally see a higher return. I have no particular need for a huge death benefit (when I am old) at this time.


What return are you expecting over 30 years?

quote:

On page 19, it states that the annual rate of Whole Life lapsing is at 4%, which would mean about 80% of investors never see the death benefit. This would mean that 80% see a bad return on their investment.


Explain. I'll try and read the article when I have time, but if 4% of policies are lapsing, how are 80% getting a poor investment?






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MontyFranklyn
Alabama Fan
T-Town
Member since Jan 2012
5514 posts

re: Whole Life Insurance Lapse Rate


If you are using it as an investment vehicle, then you can find far better places to put your money. I would say look into a UL policy or a Return on Premium. They allow you to add or lower coverage at any time and you can lower or increase your premium as well. Permanent life policies are a great way to protect and preserve your assets, but they are not the lone answer.


This post was edited on 1/26 at 12:58 pm


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GoCrazyAuburn
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re: Whole Life Insurance Lapse Rate


quote:

would say look into a UL policy.







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MontyFranklyn
Alabama Fan
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Member since Jan 2012
5514 posts

re: Whole Life Insurance Lapse Rate


quote:

Explain. I'll try and read the article when I have time, but if 4% of policies are lapsing, how are 80% getting a poor investment
They become a poor investment the longer you live honestly. They build cash value very slowly, commonly taking around 20 years to break even(the premiums you have paid being equal or greater than the cash value). Even though the death benefit does continue to rise, depending if you select paid up additions, the money you spend on them becomes absurd because you may not even need that much of a death benefit 40 years from the day you get it and the gain from cashing it out is only about 2-4%. Therefore it just isn't worth while.






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MontyFranklyn
Alabama Fan
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Member since Jan 2012
5514 posts

re: Whole Life Insurance Lapse Rate


quote:

GoCrazyAuburn
What are your objections to UL policies?






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GoCrazyAuburn
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Member since Feb 2010
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re: Whole Life Insurance Lapse Rate


quote:

What are your objections to UL policies?


Where to start. Their lack of guarantees. Historically, their performance is far worse than traditional whole life. You mentioned being able to reduce/raise premiums. What they don't tell you, is if you lower the premium, you put the policy in risk of breaking its secondary guarantees. At that point, the insurance company reserves the right to use your cash value to pay the eventual premium increases until it eats the policy alive.

I'll put it this way, I've never seen a UL actually go to maturity, and they always blow up on people. I think they are a terribly designed product that can only work well if interest rates are very high






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MontyFranklyn
Alabama Fan
T-Town
Member since Jan 2012
5514 posts

re: Whole Life Insurance Lapse Rate


All of what you have said is true, but in this environment I think they are good. With rates being as low as they are getting into one now isn't that bad of an idea especially if you are young in your mid 20s. Over fund them by $10 a month will carry the policy well into the 90s





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GoCrazyAuburn
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Member since Feb 2010
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re: Whole Life Insurance Lapse Rate


To your other post, I don't know what policies you are looking at, but most I've seen break even before year twenty, but yes I will agree that these aren't short term "investments".

However, please explain how the investment gets worse the longer you have it? They are designed to grow at a larger rate the longer you hold the policy.

If you don't want the DB to grow, change from purchasing additions to moving your dividend to go to your cash.

Why policies are you looking at that only have a 2-4% return after 40 years?






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GoCrazyAuburn
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Member since Feb 2010
15632 posts

re: Whole Life Insurance Lapse Rate


quote:

All of what you have said is true, but in this environment I think they are good. With rates being as low as they are getting into one now isn't that bad of an idea especially if you are young in your mid 20s. Over fund them by $10 a month will carry the policy well into the 90s


I'll just have to disagree here. These policies were designed to be sustained with interests rates in the teens. Over the long term, they do not last, and nobody sells them overfunded. They sell them at the minimum premium amount so that it can compete in price with WL.

After all I've seen from them, I have about as much respect for them as I do a ponzi scheme.



This post was edited on 1/26 at 1:10 pm


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GoCrazyAuburn
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re: Whole Life Insurance Lapse Rate


However, I want to get back on topic of the OP. What is the reasoning to 4% of policies lapse to 80% not getting a good investment?





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Stingray
LSU Fan
Shreveport
Member since Sep 2007
5174 posts

re: Whole Life Insurance Lapse Rate


What is the reasoning to 4% of policies lapse to 80% not getting a good investment? 


4% annually


ANNUALLY







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GoCrazyAuburn
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Member since Feb 2010
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re: Whole Life Insurance Lapse Rate


Yea, I get that. How does that equal 80%?





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Stingray
LSU Fan
Shreveport
Member since Sep 2007
5174 posts

re: Whole Life Insurance Lapse Rate


4% times number of policies times number of years

Thats not the exact formula but should show you what I'm saying

Like

4% times ten years equals 40%






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GoCrazyAuburn
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Member since Feb 2010
15632 posts

re: Whole Life Insurance Lapse Rate


That would work if the number of policies were stagnant. They are not. New policies are bought each year

Te lapse rate is for all policies eligible for a lapse, old and new.

So, in any given year, you can't expect 4% of policies to lapse. So, no, the formula does not work. After 10 years, 4% have lapsed. Not 40%.

ETA: is the article you posted looking only say only policies bought in say 2007? If so, that may be where some of my confusion is coming from.




This post was edited on 1/26 at 2:48 pm


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Stingray
LSU Fan
Shreveport
Member since Sep 2007
5174 posts

re: Whole Life Insurance Lapse Rate


I believe you are wrong. The reason for that is the number 4% is an average from the relapse rate of all policy bought at a specific year.

Example

Year zero = 100 policies

Year one has about 12% drop

Year two is about 10%

Year three is about 8%

All thru the years til the drop percentage levels at 2.5% per year

Take all those years, average it, you get 4% per year.

So,

Y0 = 100

Y1 = 100 * 0.12

Y2 = (100*0.12)* 0.10

Y3 = ((100*0.12)*0.10)*0.08

And so on, til about 80 policies have dropped






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GoCrazyAuburn
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Member since Feb 2010
15632 posts

re: Whole Life Insurance Lapse Rate


As I said earlier, I'll try and get some time to go through the article and try and understand what you are getting at.

However, what is your point you are trying to make? What about it makes WL bad?






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Stingray
LSU Fan
Shreveport
Member since Sep 2007
5174 posts

re: Whole Life Insurance Lapse Rate


However, what is your point you are trying to make? What about it makes WL bad? 




which would mean about 80% of investors never see the death benefit. This would mean that 80% see a bad return on their investment.


Does anybody have anything to bring to my original question?






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GoCrazyAuburn
Auburn Fan
Staring up at Vulcan's ass
Member since Feb 2010
15632 posts

re: Whole Life Insurance Lapse Rate


They are choosing to forego the investment though. If you are looking at not getting the death benefit, then buying the term is worse because of the higher lapse rate.

I'm not trying to argue either way on the term/WL argument because they can both make sense, but arguing that WL is bad because people lapse their policy on their own accord is a bit silly IMO.

That would be about on par as saying buying term and investing the difference is not a good strategy because many people don't invest the difference systematically over their lifetime. Buying term and investing the difference can be a good option. Whether people actually follow through with it doesn't change it's effectiveness as a strategy.






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Stingray
LSU Fan
Shreveport
Member since Sep 2007
5174 posts

re: Whole Life Insurance Lapse Rate


Point remains that 80% don't get the death benefit. Yes you could agrue that that was their bad choice. But 80% is a huge number.

Something about Whole Life, or the way it is sold to people, who initially think they will enjoy a death benefit, but don't - something is rotten about it.






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