Overall lapse rates for whole life plans were down in 2003 and 2004, according to a joint study sponsored by LIMRA International, Windsor, Conn., and the Society of Actuaries, Schaumburg, Ill.

And, according to the recently released study, titled ‘U.S. Individual Life Persistency Update,’ consistent with past studies for permanent insurance products, lapse rates are generally decreasing as issue age increases. However, the differences become smaller and the pattern less consistent over time, according to the study authored by Marianne Purushotham and Nancy Muise, LIMRA product researchers. The study represents more of the market and gathered data of more depth than in previous years, says Catherine Theroux, a LIMRA spokesperson.

By product

The study of 43 individual life insurance writers found that the overall lapse rate for whole life plans for all products and policy years combined was 3.5% on a policy basis and 4.4% on a face amount basis in 2003 and 2004, down from 3.9% and 5.8% respectively for the 2001-2002 time frame.

Total lapse rates for term insurance for all products and all policy years combined was 7% on a policy basis and 6.2% on a face amount basis, a decrease of 3.2% on a policy basis and 4.1% on a face amount basis from the 2001-2002 report, according to the report.

“Shock” lapse rates for level premium term products after the end of the guaranteed level premium period ranged from an average of 14% for 5-year term to 40% for 10-year level premium term and 30% for 15-year level premium term on a policy basis.

The overall lapse rate for universal life products for all policy years combined declined to 4.6% from 5.3% in 2001-2002. There has been a modest reduction in lapse rates at all policy durations versus the 2001-2002 timeframe, the study says. And, the overall lapse rate for variable universal life plans covered by the current study was 5.7% on a policy basis (down from 8.5% during calendar years 2001-2002) and 6.4% on a face amount basis (down from 8.8% during calendar years 2001-2002). Lapse rates have reduced from levels seen during 2001-2002, but have not decreased to levels that were seen in the mid-1990s.

By age

Although lapse rates are generally decreasing with age, the study reports there is one exception: policies on individuals under the age of 20. This group, according to the study, has lapse experience more in keeping with the age 30-39 and 40-49 groups, possibly a reflection of older adult family members paying the premium, adults with different perspectives on keeping a policy in force.

Attained age whole life exposure was greatest in the 70+ age group which represents 24% of the total policies exposed. That group was followed by the 50-59 age group with a 20% exposure and the 60-69 age group with a 17% exposure. Exposures were lower for younger age groups as witnessed by the following attained age results: under 20, 7%; 20-29, 6%; 30-39, 10%; and, 40-49, 16%.

By issue age, whole life exposures were reversed, with younger ages making up the greatest percentage of the policies.

Younger ages, however, have a great likelihood of lapse on both bases, according to Purushotham. The only difference is the amount of policies within each age group, she continues. So, notes Purushotham, at issue, there are more people under age 20 that bought policies. But, she adds, there are now more policyholders that are now in their 50s and older. The exposure rates are as follows: under 20, 31%; 20-29, 23%; 30-39, 20%; 40-49, 13%; 50-59, 7%; 60-69, 3%; and,

Term life lapse rates by attained age ranged from roughly 8% for policyholders aged 20 for yearly renewable term, 10-year level premium term, and 20-year level premium term and increased to approximately 12-13% for YRT and 10-year term at age 25 and 11% for 20-year term. At age 25, lapses for the product start to diverge, with YRT and 10-year term remaining in the 7-8% range through age 58, and 20-year term registering a much lower 4% range. At that point, all of these types of term, according to the study, diverge. Twenty-year term continues to trail lower until around age 72 when it is approximately 2%. YRT trends much higher, peaking at 18% at age 70 and ending at around 14% at age 78. Ten-year term remains relatively constant at about 8% through age 70 before climbing to 12% at age 80.

By issue age, YRT term life exposures uncovered by the LIMRA-SOA study suggested greater persistency at younger issue ages. For example, Purushotham says, “If you calculate 10-year persistency rates based on the lapse rates as detailed in the report, for issue age 60-69, only 29% of the business is left. At ages 30-39, she continues, 44% of the business is left. The exposures by age were as follows: under 20, 6%; 20-29, 20%; 30-39, 45%; 40-49, 22%; 50-59, 6%; and, 60-69, 1%.

By issue age, 10-year level premium term lapse rates were highest for the youngest age groups.

In contrast to YRT, according to Purushotham, the level premium term business seems to have higher rates of lapse at younger ages during the level period. This trend reverses after the expiration of the premium guarantee as detailed in the report, she added. Exposure was as follows: 1% for the under 20; 20-29, 9%; 30-39, 32%; 40-49, 31%; 50-59, 20%; and, 60-69, 7%.

For 20-year level term, the highest lapse exposure was in the 30-39 age group with 39% of the policies exposed in this age range, the 40-49 age group with 34%; and the 50-59 age group with 15%. For the 20-29 age group the lapse exposure was 10% and for the 60-69 group, 2%.

Universal life lapse exposure at attained ages was highest for middle-aged policyholders in the 50-59 group with a 23% exposure followed by the 40-49 group with a 22% lapse exposure, the LIMRA-SOA study found. In the 60-69 age group, it was 14% and in the 70+ group, 10%. For younger groups, the rate was as follows: under 20, 10%; 20-29, 8%; and, 30-39, 13%.

By issue age, the breakout by age bands for universal life was much the same as attained age. In the 30-39 age range, the lapse exposure was 24% and in the 40-49 range, 21%. The other age brackets were as follows: under 20, 19%; 20-29, 15%; 50-59, 13%; 60-69, 6%; and, 70+, 2%.

Variable universal life by attained age had much the same lapse exposure pattern as universal life. In the 40-49 age range it was 28%, 23% in the 50-59 age range and 18% in the 30-39 age group. In the younger age bands, the exposure was 10% for under 20 and 7% in the 20-29 age range. In the older age groups, the lapse exposure was 10% for the 60-69 age group and 4% for the 70+ age range.

And, by issue age, the same age bands had the greatest exposure to lapses for the VUL product. In the 30-39 age group, the exposure was 31%; in the 40-49 group, 23%; and in the 20-29 age group, 17%. For those under 20, the lapse exposure rate was 14%, for those 50-59, 10%, for the 60-69 age group, 4% and for the 70+ age range, 1%, according to the study.