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When Term Life Policyholders Leave the Level-Premium Bubble

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What You Need to Know

  • The new Society of Actuaries study is a sequel to earlier term life shock lapse reports.
  • One part of the package is do-it-yourself lapse rate and death rate analysis tools.
  • People ages 70 and older who keep $1 million or more in coverage in place are especially high-risk.

People who face a sudden spike in their term life insurance premiums, because the level-premium term is ending, seem to be good at at predicting whether they’re likely to die, according to a new term life report from the Society of Actuaries.

Policyholders ages 60 and older who keep their term life coverage in place after the premiums go up are at least twice as likely to die as they were to die during the level-premium term.

The mortality gap is even bigger for older insureds, and for insureds with more coverage coverage.

Insureds ages 70 and older who hang on to $1 million or more in coverage after either a 10-year or 15-year level-premium term expires have a death rate that’s 7.9 times higher than the death rate for during the level-premium term.

When insureds ages 70 and older keep $1 million or more in coverage after a 15-year term expires, the death rate is close to 15 times higher than the death rate during the level-term period.

Term vs. Whole Life

A traditional whole life policy is designed to cover the insured until age 100, or even till age 120, and the premiums are supposed to stay the same for the insured’s entire life.

A term life policy, in contrast, is aimed at people who need a large amount of affordable insurance coverage for a relatively short period of time. A typical term life policy might have a provision that keeps the premiums level for a period of just five, 10, 15 or 20 years. After the term expires, the insurer can increase the premiums.

In many cases, the researchers found, the new premium is more than five times higher than the old premium.

About 41% of the new individual life policies purchased in 2019 were term life policies, according to the American Council of Life Insurers.

The Study

Four actuaries at Scor — Aisling Bradfield, Carolyn Covington, Rebecca Reppert and Julien Tomas — prepared the new U.S. Post-Level Term Lapse and Mortality Experience Report  for the SOA.

The SOA commissioned similar studies in 2010 and 2014.

The SOA’s goal is to understand what happens to large blocks of term life policies as the insureds age.

Life insurers have always known that the insureds who keep term life policies after the level-premiums expire are likely to have higher mortality rates than people who drop their coverage, but the SOA wants to get hard data on what happens when level-premium terms end.

Unlike the 2014 study, the new study now includes data on policies with 20-year level-premium terms, and it includes data on how billing type affects the policy lapse rate.

The new study also includes a set of Tableau-based lapse rate analysis tools and a set of Tableau-based mortality analysis tools.

Members of the public can use the tools themselves to see how a variety of factors affect lapse and mortality rates.

Details Count

The actuaries found that seemingly small details had a big effect on lapse rates after level-premium terms ended.

When policyholders were already paying monthly premiums automatically, and continued to do so after the level-premium terms ended, they were likely to keep their policies.

When policyholders were shifting from automatic payments to getting a bill in the mail, and they were supposed to pay the entire increased premium for the coming year all at once, they were more likely to drop their policies.

Why the Study Matters

The new SOA study could eventually affect how life insurers develop and price their term life products.

(Image: Shutterstock)