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Started By
Message
re: Whole Life Insurance Lapse Rate
Posted on 1/26/14 at 2:39 pm to Stingray
Posted on 1/26/14 at 2:39 pm to Stingray
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.
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 1/26/14 at 2:48 pm
1
Posted on 1/26/14 at 2:58 pm to GoCrazyAuburn
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
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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