A 2005 Report
U.S. INDIVIDUAL LIFE PERSISTENCY
UPDATE
A JOINT STUDY SPONSORED BY LIMRA INTERNATIONAL
AND THE SOCIETY OF ACTUARIES
Marianne Purushotham
Product Research
860-285-7794
© 2005, LIMRA International, Inc.®
300 Day Hill Road, Windsor, Connecticut 06095-4761, U.S.A.
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This publication is a benefit of LIMRA International and the Society of Actuaries membership. No part may
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written permission.
007108-0306-30-B94 Printed in U.S.A.
CONTENTS
Page
EXECUTIVE SUMMARY ..................................................................................................7
RECOMMENDATIONS .....................................................................................................9
METHODOLOGY...........................................................................................................10
SAMPLE DESCRIPTION.................................................................................................11
OVERALL RESULTS .....................................................................................................12
WHOLE LIFE INSURANCE............................................................................................14
Gender.........................................................................................................................16
Issue Age.....................................................................................................................16
Attained Age...............................................................................................................17
Premium Payment Mode.............................................................................................18
Risk Class ...................................................................................................................18
Smoking Status ...........................................................................................................19
Underwriting Method..................................................................................................20
Single Premium Whole Life .......................................................................................21
TERM LIFE INSURANCE...............................................................................................23
Gender.........................................................................................................................25
Issue Age.....................................................................................................................25
Attained Age...............................................................................................................26
Premium Payment Mode.............................................................................................27
Risk Class ...................................................................................................................27
Smoking Status ...........................................................................................................28
Underwriting Method..................................................................................................29
Page
UNIVERSAL LIFE INSURANCE......................................................................................30
Gender.........................................................................................................................32
Issue Age.....................................................................................................................33
Attained Age...............................................................................................................34
Risk Class ...................................................................................................................34
Smoking Status ...........................................................................................................35
Underwriting Method..................................................................................................35
Death Benefit Option..................................................................................................36
VARIABLE UNIVERSAL LIFE INSURANCE....................................................................37
Gender.........................................................................................................................39
Issue Age.....................................................................................................................40
Attained Age...............................................................................................................40
Risk Class ...................................................................................................................41
Smoking Status ...........................................................................................................41
PREMIUM PERSISTENCY EXPERIENCE FOR FLEXIBLE PREMIUM PRODUCTS............42
Premium Payment Ratio .............................................................................................42
Excess Premium Ratio................................................................................................44
Total Premium Collection Growth Ratio....................................................................46
PARTICIPATING COMPANIES.......................................................................................47
RELATED LINKS ..........................................................................................................48
FIGURES AND TABLES
Page
Figure 1 Individual Life Policy Lapse Rates....................................................................12
Figure 2 Individual Life Face Amount Lapse Rates.........................................................13
Figure 3 Individual Life versus Individual Disability and Long-Term Care
Insurance Lapse Experience..............................................................................13
Figure 4 Whole Life Policy Lapse Rates..........................................................................14
Figure 5 Whole Life Face Amount Lapse Rates ..............................................................15
Figure 6 Whole Life Lapse Rates by Policy Size.............................................................15
Figure 7 Whole Life Policy Lapse Rates by Gender........................................................16
Figure 8 Whole Life Policy Lapse Rates by Issue Age Group.........................................17
Figure 9 Whole Life Policy Lapse Rates by Attained Age Group...................................17
Figure 10 Whole Life Policy Lapse Rates by Premium Payment Mode..........................18
Figure 11 Whole Life Policy Lapse Rates by Risk Class.................................................19
Figure 12 Whole Life Policy Lapse Rates by Smoking Status.........................................19
Figure 13 Whole Life Policy Lapse Rates by Underwriting Method...............................20
Figure 14 Single Premium Whole Life Policy Lapse Rates.............................................21
Figure 15 Single Premium Whole Life Face Amount Lapse Rates..................................21
Figure 16 Single Premium Whole Life Policy Lapse Rates by Gender...........................22
Figure 17 Single Premium Whole Life Face Amount Lapse Rates by Gender................22
Figure 18 Term Life Policy Lapse Rates..........................................................................24
Figure 19 Term Life Face Amount Lapse Rates ..............................................................24
Figure 20 Term Life Policy Lapse Rates by Gender........................................................25
Figure 21 Term Life Policy Lapse Rates by Issue Age Group.........................................26
Figure 22 Term Life Policy Lapse Rates by Attained Age Group...................................26
Figure 23 Term Life Policy Lapse Rates by Premium Payment Mode............................27
Page
Figure 24 Term Life Policy Lapse Rates by Risk Classification .....................................28
Figure 25 Term Life Policy Lapse Rates by Smoking Status...........................................28
Figure 26 Term Life Policy Lapse Rates by Underwriting Method.................................29
Figure 27 Universal Life Policy Lapse Rates...................................................................31
Figure 28 Universal Life Face Amount Lapse Rates .......................................................31
Figure 29 Universal Life Lapse Rates by Policy Size......................................................32
Figure 30 Universal Life Policy Lapse Rates by Gender.................................................32
Figure 31 Universal Life Face Amount Lapse Rates by Gender......................................33
Figure 32 Universal Life Policy Lapse Rates by Issue Age Group..................................33
Figure 33 Universal Life Policy Lapse Rates by Attained Age Group ............................34
Figure 34 Universal Life Policy Lapse Rates by Risk Class............................................34
Figure 35 Universal Life Policy Lapse Rates by Smoking Status....................................35
Figure 36 Universal Life Policy Lapse Rates by Underwriting Method..........................35
Figure 37 Universal Life Policy Lapse Rates by Death Benefit Option...........................36
Figure 38 Universal Life Face Amount Lapse Rates by Death Benefit Option...............36
Figure 39 Variable Universal Life Policy Lapse Rates....................................................38
Figure 40 Variable Universal Life Face Amount Lapse Rates.........................................38
Figure 41 Variable Universal Life Policy Lapse Rates by Gender ..................................39
Figure 42 Variable Universal Life Face Amount Lapse Rates by Gender.......................39
Figure 43 Variable Universal Life Policy Lapse Rates by Issue Age Group...................40
Figure 44 Variable Universal Life Policy Lapse Rates by Attained Age Group..............40
Figure 45 Variable Universal Life Policy Lapse Rates by Underwriting Class...............41
Figure 46 Variable Universal Life Policy Lapse Rates by Smoking Status.....................41
Figure 47 Premium Payment Ratios.................................................................................43
Figure 48 Premium Payment Ratios — Males versus Females........................................43
Figure 49 Premium Payment Ratios — By Issue Age Group..........................................44
Page
Figure 50 Excess Premium Ratios....................................................................................45
Figure 51 Excess Premium Ratios — By Issue Age Group.............................................45
Figure 52 Total Premium Collection Growth Ratios........................................................46
Figure 53 Total Premium Collection Growth Ratios — By Issue Age Group.................46
• • • • •
Table 1 Study Sample — Number of Policies..................................................................11
Table 2 Study Sample — Face Amount...........................................................................11
Table 3 Whole Life Coverage Activity Reported During the Observation Period...........14
Table 4 Term Life Coverage Activity Reported During the Observation Period.............23
Table 5 Universal Life Coverage Activity Reported During
the Observation Period .......................................................................................30
Table 6 Variable Universal Life Coverage Activity Reported During
Observation Period .............................................................................................37
7
EXECUTIVE SUMMARY
For all individual life insurance products combined, lapse rates have increased from levels
observed in a previous LIMRA persistency study covering the mid-1990s experience period.
With the exception of the early years, policy lapse rates for the current study observation period
were higher across all durations. The overall lapse rate for the 2001-2002 observation period was
4.9% on a policy basis and 7.8% on a face amount basis.
Individual life insurance products experienced higher rates of lapse than either individual
disability income or individual long-term care insurance plans. And the difference is greatest for
policies in durations 5 through 10. In response to the poor performance of financial markets
during the observation period of the current study, many individual life carriers began to focus
new product development work on products with strong guarantees, including term, guaranteed
universal life, and even whole life. This resulted in replacement of both variable policies and
older, less competitive guaranteed products with more competitive newer products.
The overall lapse rate for whole life insurance plans was 3.9 on a policy basis and 5.8% on a face
amount basis. Policy lapse rates have increased slightly from the mid-1990 levels for all policy
years.
Total lapse rates for term insurance for all policy years combined were 10.2% on a policy basis
and 10.3% on a face amount basis. Experience has worsened slightly since the mid-1990s for
policies in years 11 and later; however, rates of lapsation have declined for policies in years 1
through 10. Some of the increase in lapses in the later years is attributable to shock lapses on
level premium term policies nearing the end of the level premium period.
Shock lapse rates (rates of lapse for policies near the end of the guaranteed level premium period)
for level-premium term plans included in the current study ranged from 30% to 50% and tended
to vary with the length of the guaranteed premium period.
The overall lapse rate for universal life (UL) products for all policy years combined was 5.3% on
both a policy basis and on a face amount basis. With the exception of policies in year 1, UL lapse
rates have increased from the levels seen in previous individual life persistency studies.
The overall lapse rate for variable universal life (VUL) plans covered by the current study was
8.5% on a policy basis and 8.8% on a face amount basis. Lapse rates have increased significantly
from levels observed during the mid-1990s. This is likely the result of the poor equity market
performance and continual volatility of returns over the observation period of the current study.
Many policyholders became disillusioned with variable products after seeing their cash values
shrink significantly. And, in the case of variable universal life plans, in many instances additional
unplanned premium payments were required to keep policies in force.
8
Premium persistency was also examined as part of this study. Premium payment ratios are
calculated as the ratio of actual premium paid (up to the planned or billed amount) to the planned
premium amount on policies that survive the observation period. Premium payment ratios have
increased slightly for policies in the first three years, but have decreased for policies that are in
duration 4 or later.
Excess premiums are defined as any amounts paid into universal life or variable universal life
policies greater than the planned premium for a given policy year. Excess premium ratios
(the ratio of amounts above the planned premium level to the planned premium amount) have
increased dramatically since the mid-1990s, especially for policies in their early years. Again,
during the observation period of the current study, the industry saw a good deal of replacement
of existing universal life and variable universal life policies with updated and more competitive
product designs. This may also explain some of the increased excess premium in early durations.
9
RECOMMENDATIONS
This report examines lapse experience on individual life products for a variety of policy and product
factors. The study can be used for industry benchmarking, as well as for background information for
the product development and planning process.
The data contained in this report can help companies identify factors that impact individual life
insurance persistency. However, since the participants in the current study do not represent the entire
industry and results for specific companies can vary, sometimes dramatically, these results should
be used only as a supplement to the experience of the individual carrier. Companies should carefully
consider underlying differences in distribution, product design, product development, and market
strategy between their own organizations and current study participants.
To aid the reader in interpreting the information contained in this report, an Excel spreadsheet, which
provides exposure information by lapse factor and data cell, is also available. The Excel file also
contains face amount lapse data for all policy factors discussed in this report.
10
METHODOLOGY
For purposes of this report, lapse includes termination for nonpayment of premium, insufficient cash
value, full surrender of a policy, transfer to reduced paid-up or extended term status, and terminations
for unknown reason. This is consistent with the definition of lapse applied for other LIMRA and
Society of Actuaries experience studies and allows for comparison of results over time.
Participants were asked to provide information on their entire in-force blocks and, except in cases
where a company’s volume of business was so large or its experience so different from that of other
participants that overall results would be unduly skewed, the lapse rates shown are based on 100% of
policies submitted by the company.
It should be noted that not all participants in the study contributed data for their entire in-force block
including all subsidiaries, product lines and policy years. In addition, several companies did not
provide data for all policy and product factors requested. Therefore, care should be taken in
interpreting results. The number of companies contributing to each lapse factor examined is indicated
in the appropriate report section.
Due to the scarcity of data provided, lapse experience could not be examined by distribution channel
for this or previous LIMRA persistency studies. We continue to work with participating companies to
try to increase the level of detail included in study data submissions.
The observation period for the study is calendar years 2001 and 2002. The data for this report was
collected on a policy level (seriatim) basis as this allows for a more detailed analysis of the factors
influencing lapse results than studies conducted on an aggregated data basis.
Lapse rates are calculated as follows:
Annualized Policy Lapse Rate = 100 x Number of Policies Lapsed During the Year
Number of Policies Exposed to Lapse During the Year
The number of policies exposed to lapse is based on the length of time the policy is exposed to the
risk of lapsation during the year. Lapses contribute exposure for the full 12 months. Terminations due
to death, expiry, maturity or conversion are not included in the amounts lapsing and contribute
exposure for only the fraction of the year they were in force.
Industry lapse rates are calculated as a weighted average of the experience of all contributing
companies, so companies with larger in-force blocks will affect the overall results more than
companies with smaller in-force blocks.
11
SAMPLE DESCRIPTION
Of the 22 companies participating in the study, 20 companies provided whole life data, 22 provided
term data, 12 provided universal life data, and six submitted variable universal life data. Tables 1 and
2 below show the number of exposure records and the associated face amount in force for each
product in the study sample. Some participants did not submit in force for all affiliated companies, all
product lines and observation years.
Table 1
Study Sample — Number of Policies
Issue year
Whole life
(20 cos.)
Term life
(22 cos.)
Universal life
(12 cos.)
Variable
universal life
(6 cos.)
Total
2001–2002 325,925 599,197 128,110 27,100 1,080,332
2000 604,479 738,210 115,910 26,041 1,484,640
1999 675,866 1,015,573 106,967 25,353 1,823,759
1998 678,666 892,267 93,594 32,916 1,697,443
1997 734,194 796,920 103,730 33,508 1,668,352
1994–1996 2,562,210 1,580,264 239,370 103,166 4,485,010
1989–1993 5,881,863 1,277,018 421,633 138,335 7,718,849
Pre 1989 35,911,304 1,515,596 870,354 79,071 38,376,325
Total 47,374,507 8,415,045 2,079,668 465,490 58,334,710
Table 2
Study Sample — Face Amount
In Millions
Issue year
Whole life
(20 cos.)
Term Life
(22 cos.)
Universal life
(12 cos.)
Variable
universal life
(6 cos.)
Total
2001–2002 31,640 207,102 42,052 12,226 293,020
2000 48,411 236,043 39,026 12,834 336,314
1999 54,585 224,375 35,325 9,302 323,587
1998 56,585 193,291 30,480 9,235 289,591
1997 64,890 162,262 25,644 8,237 261,033
1994–1996 208,075 314,462 46,989 18,918 588,444
1989–1993 442,773 235,133 56,466 18,945 753,317
Pre 1989 535,140 109,299 90,925 8,354 743,718
Total 1,442,099 1,681,967 366,907 98,051 3,589,024
12
OVERALL RESULTS
This report presents the results of a study of individual life insurance lapse experience in the United
States conducted jointly by LIMRA International and the Society of Actuaries. The study is based on
data provided by 22 individual life insurance companies and it presents lapse experience for whole
life, term life, universal life, and variable universal life plans traced through 2002. Premium
persistency under flexible premium payment products (universal life and variable universal life) is
also examined.
For all individual life insurance products combined, lapses have increased from mid-1990 levels.
This is consistent with industry-based policy lapse ratios calculated using annual statement data for
years 1995-1996 and 2001-2002. With the exception of the first two years, policy lapse rates for the
current study observation period were higher at all durations (Figure 1).
Figure 1
Individual Life Policy Lapse Rates
0%
2%
4%
6%
8%
10%
12%
1 2 3 4 5 6-10 11-20 21+
Policy Year
2001-2002 1994-1996
On a face amount basis, lapse rates emerged in a more level pattern by policy year with lower lapse
rates on a face amount basis for policies in the early years and higher lapse rates on a face amount
basis for policies in the later years (Figure 2).
13
Figure 2
Individual Life Face Amount Lapse Rates
0%
2%
4%
6%
8%
10%
12%
1 2 3 4 5 6-10 11-20 21+
Policy Face Amount
Individual life insurance products also experienced higher lapse rates than did either individual
disability income or individual long-term care insurance plans (Figure 3). During the observation
period of the current study, the financial markets were in significant turmoil as poor performance of
equity investments combined with all-time low interest rates. In response, many individual life
carriers began to focus new product development work on products with strong guarantees including
term, guaranteed universal life, and even whole life. This resulted in replacement of both variable
policies and older, less competitive guaranteed products with the newer more competitive options.
Figure 3
Individual Life versus Individual Disability and Long-Term Care Insurance
Lapse Experience
0%
2%
4%
6%
8%
10%
12%
1 2 3 4 5 6-10 11-20 21+
Policy Year
Individual Life Individual DI Individual LTC
14
WHOLE LIFE INSURANCE
This section of the report focuses on traditional whole life plans. However, the results include a small
number of graded premium life, interest-sensitive whole life, and modified life policies, as well.
Table 3 shows policy activity during the observation period for whole life plans.
Table 3
Whole Life Coverage Activity Reported During the Observation Period
Percentage of Policy Records Submitted
Coverage activity Percent of Policies
Lapse for full surrender or nonpayment of premium 3.3%
Death 1.2
Converted to another plan of insurance 0.4
Expiry/maturity 1.0
Remaining in force 94.1
Total 100.0%
The overall lapse rate for whole life insurance plans for all product designs and policy years
combined was 3.9% on a policy basis and 5.8% on a face amount basis. Figure 4 below shows policy
lapse rates by year for whole life plans from the 1994-1996 and 2001-2002 experience periods. Note
that lapse rates have increased slightly across all policy years. Some of this may be due to the
introduction of stronger no-lapse guarantees on some universal life plans. These newer universal life
products have become a source of competition for traditional whole life plans and may have led to
some replacement activity.
Figure 4
Whole Life Policy Lapse Rates
0%
2%
4%
6%
8%
10%
12%
14%
1 2 3 4 5 6-10 11-20 21+
Policy Year
2001-2002 1994-1996
15
On a face amount basis, whole life lapse rates tend to emerge in a more level pattern by policy year.
And, with the exception of the first year, face amount lapse rates have also increased at all durations
since the mid-1990s (Figure 5).
Figure 5
Whole Life Face Amount Lapse Rates
0%
2%
4%
6%
8%
10%
12%
14%
1 2 3 4 5 6-10 11-20 21+
Policy Year
2001-2002 1994-1996
And, as in past studies, during the first five years, smaller whole life policies were more likely to
lapse than larger policies (Figure 6).
Figure 6
Whole Life Lapse Rates by Policy Size
0%
2%
4%
6%
8%
10%
12%
14%
16%
123456-1011-2021+
Policy Year
Under $100,000 $100,000 and over
The remainder of the whole life section of this report looks at those policy and product features most
likely to affect lapse experience for whole life plans. These factors include gender, issue age, attained
age, premium payment mode, risk class, smoking status, and underwriting method.
16
GENDER
The whole life sample population is 60% male, 40% female on a policy basis and 75% male, 25%
female on a face amount basis. The average face amount for males is $40,000, while the average for
females is $26,000. Total policy lapse rates for females were slightly higher than for males with
differences seen in the early policy years (Figure 7).
Figure 7
Whole Life Policy Lapse Rates by Gender
Includes 19 Companies
0%
2%
4%
6%
8%
10%
12%
14%
1 2 3 4 5 6-10 11-20 21+
Policy Year
Males Females
ISSUE AGE
Lapse experience generally improves with increasing age at issue (Figure 8). The exception to this
is policies issued on individuals under the age of 20 whose lapse rates are closer to those of the age
30-39 and 40-49 issue age groups. This may be because premiums for these policies are paid by older
adult family members rather than the insureds themselves. So, the pattern of lapse may be more
closely tied to the age of the adult premium-payers.
17
Figure 8
Whole Life Policy Lapse Rates by Issue Age Group
Includes 18 Companies
0%
2%
4%
6%
8%
10%
12%
14%
16%
1 2 3 4 5 6-10 11-20 21+
Policy Year
Under 20 20-29 30-39 40-49 50-59 60 and older
ATTAINED AGE
Figure 9 shows policy lapse rates for various attained ages. Following a pattern very similar to the
data by issue age group, lapses decrease with increasing attained age. Again, the exception to this is
the case of policyholders under the age of 20.
Figure 9
Whole Life Policy Lapse Rates by Attained Age Group
Includes 17 Companies
0%
2%
4%
6%
8%
10%
12%
14%
16%
1 2 3 4 5 6-10 11-20 21+
Policy Year
Under 20 20-29 30-39 40-49 50-59 60 and older
18
PREMIUM PAYMENT MODE
As seen in previous studies of whole life persistency experience, lapse rates generally increase with
the number of premium payments made each year (Figure 10). Note that the exception to this rule is
policies paid on a monthly basis. This category includes policies billed on a direct basis, as well as
those paid through electronic fund transfer methods where the automatic nature of the transaction
tends to lead to improved policy persistency.
Figure 10
Whole Life Policy Lapse Rates by Premium Payment Mode
Includes 13 Companies
0%
5%
10%
15%
20%
25%
123456-1011-2021+
Policy Year
Annual Semiannual Quarterly Monthly
RISK CLASS
With the exception of the first policy year, where “buyer’s remorse” has the greatest impact on
lapsation, experience doesn’t vary significantly by risk class (Figure 11). The preferred classes
tended to have slightly better persistency than either the standard or substandard classes, especially
in the first policy year. At the latest policy durations, lapse levels are similar across the various risk
groups.
19
Figure 11
Whole Life Policy Lapse Rates by Risk Class
Includes 13 Companies
0%
2%
4%
6%
8%
10%
12%
14%
1 2 3 4 5 6-10 11-20 21+
Policy Year
Preferred Standard Substandard
SMOKING STATUS
Smokers and nonsmokers also exhibited similar rates of lapsation by policy year with nonsmokers
lapsing slightly more often than smokers in the early years and the opposite trend in later years
(Figure 12).
Figure 12
Whole Life Policy Lapse Rates by Smoking Status
Includes 17 Companies
0%
2%
4%
6%
8%
10%
12%
123456-1011+
Policy Year
NonSmokers Smokers
20
UNDERWRITING METHOD
Looking at results by the underwriting method used, policies issued with full medical underwriting or
on a paramedical basis exhibited the lowest rates of lapsation. Whole life policies issued on a
nonmedical basis (using a traditional nonmedical questionnaire with a complete set of medical
history questions) or on a simplified issue basis (with less than a full nonmedical screening)
experienced higher lapse rates for the first five policy years (Figure 13).
Figure 13
Whole Life Policy Lapse Rates by Underwriting Method
Includes 14 Companies
0%
5%
10%
15%
20%
1 2 3 4 5 6-10 11-20 21+
Policy Year
Medical Paramedical Non Medical Simplified Issue
21
SINGLE PREMIUM WHOLE LIFE
Six companies provided data on single premium whole life insurance plans. For these companies,
single premium products experienced significantly lower rates of lapse than recurring premium
products (Figure 14).
Figure 14
Single Premium Whole Life Policy Lapse Rates
0%
2%
4%
6%
8%
10%
12%
14%
1 2 3 4 5 6-10 11+
Policy Year
Single Premium Whole Life Recurring Premium Whole Life
And, single premium lapses are even lower on a face amount basis than on a policy count basis
(Figure 15).
Figure 15
Single Premium Whole Life Face Amount Lapse Rates
0%
1%
2%
3%
123456-1011+
Policy Year
Policy Lapse Rates Face Amount Lapse Rates
22
Overall lapse rates for single premium whole life plans were similar for males and females. However,
there was some variance in the results by duration on both a policy count and a face amount basis
(Figures 16 and 17).
Figure 16
Single Premium Whole Life Policy Lapse Rates by Gender
0%
1%
2%
3%
123456-1011+
Policy Year
Males Females
Figure 17
Single Premium Whole Life Face Amount Lapse Rates by Gender
0%
1%
2%
3%
123456-1011+
Policy Year
Males Females
23
TERM LIFE INSURANCE
This portion of the report contains experience for annually renewable term and level-premium term
plans combined. The exposure for early policy years is predominantly level-premium term, while the
exposure for policy years 15 and later consists of mostly annually renewable term policies.
Some participating company term data submissions included level term insurance that had reached
the end of the level premium period during the experience period of the study. Wherever possible,
these blocks were identified and policies that were near the end of the level-premium term period
were excluded for purposes of examining total term lapse rates. However, these policies were later
reviewed in an attempt to estimate end-of-guarantee period shock lapse rates for level-premium term
products.
Table 4 shows policy activity during the observation period for term insurance policies.
Table 4
Term Life Coverage Activity Reported During the Observation Period
Percentage of Policy Records Submitted
Termination activity Percent of Policies
Lapse for nonpayment of premium 9.5%
Death 0.2
Converted to another plan of insurance 0.9
Expiry/maturity 0.1
Remaining in force 89.3
Total 100.0%
Total lapse rates for term insurance products for all policy years combined was 10.2% on a policy
basis and 10.3% on a face amount basis. Figure 18 below shows policy lapse rates by year for term
life plans from the 1994-1996 and 2001-2002 experience periods. Experience has worsened slightly
for policies in years 11 and later; however, term rates of lapsation have decreased for policies in
years 1 through 10. The increase in term lapse rates seen in durations 11 and later is due at least in
part to shock lapses on level-premium term business as not all participating companies were able to
separately identify this business.
24
Figure 18
Term Life Policy Lapse Rates
0%
2%
4%
6%
8%
10%
12%
14%
123456-1011-2021+
Policy Year
2001-2002 1994-1996
The trend in experience is similar on a face amount basis, but lapse rates are lower in the first few
policy years (Figure 19).
Figure 19
Term Life Face Amount Lapse Rates
0%
2%
4%
6%
8%
10%
12%
14%
16%
1 2 3 4 5 6-10 11-20 21+
Policy Year
2001-2002 1994-1996
As with the whole life products, the remainder of the term insurance section of the report looks at
those policy and product features most likely to affect lapse experience for term life plans. These
factors include gender, issue age, attained age, premium payment mode, risk class, smoking status,
and underwriting method.
25
GENDER
The term sample is 40% female, 60% male by policy count and 25% female, 75% male by face
amount. The average face amount for females was $140,000 and the average face amount for males
was $240,000. For term insurance plans, females exhibited better persistency than males did across
all policy years (Figure 20).
Figure 20
Term Life Policy Lapse Rates by Gender
Includes 22 Companies
0%
2%
4%
6%
8%
10%
12%
14%
1 2 3 4 5 6-10 11-20 21+
Policy Year
Males Females
ISSUE AGE
Term insurance policy lapse rates do not vary as much by issue age group as permanent policies do
(Figure 21). Total lapse rates are highest at the youngest and oldest ages, including individuals under
30 and over 60 years of age at issue. Young and healthy policyholders were likely replacing their
existing policies at more competitive rates, while older policyholders may have been lapsing due to
less perceived need for life insurance protection combined with the fact that rates can become
prohibitively expensive at the higher ages. Lapse experience was very similar for issue ages between
30 and 60, with approximately 10% of policies lapsing each year for the first 10 to 20 years.
26
Figure 21
Term Life Policy Lapse Rates by Issue Age Group
Includes 21 Companies
0%
5%
10%
15%
20%
25%
123456-1011+
Policy Year
Under 30 30-39 40-49 50-59 60 and over
ATTAINED AGE
Figure 22 shows policy lapse rates for various attained ages and indicates that in a pattern very
similar to the experience by issue age, lapses are relatively level at around 10% until years 11 and
later. Again, the exception to this is individuals under the age of 30 who exhibited poorer persistency.
Figure 22
Term Life Policy Lapse Rates by Attained Age Group
Includes 19 Companies
0%
5%
10%
15%
20%
25%
123456-1011+
Policy Year
Under 30 30-39 40-49 50-59 60 and over
27
PREMIUM PAYMENT MODE
In a pattern similar to other individual life insurance products, lapse rates for term insurance
generally increase with the number of premium payments made each year (Figure 23). Again, as with
whole life insurance plans, the exception is policies paid on a monthly basis. This category includes
both policies billed on a direct basis and those paid through electronic fund transfer methods where
the automatic nature of the transaction can lead to improved policy persistency.
Figure 23
Term Life Policy Lapse Rates by Premium Payment Mode
Includes 18 Companies
0%
5%
10%
15%
20%
25%
1 2 3 4 5 6-10 11-20 21+
Policy Year
Annual Semiannual Quarterly Monthly
RISK CLASS
Term insurance policies that were classified as substandard risks at issue had higher rates of lapsation
than policies issued as standard or preferred risks for most policy years (Figure 24). In the later
policy years, lapse rates for substandard policies are significantly greater. This may be a data
anomaly as the sample size for durations 11 and later is relatively small, representing only 13% of
the total exposure for substandard cases.
28
Figure 24
Term Life Policy Lapse Rates by Risk Classification
Includes 18 Companies
0%
5%
10%
15%
20%
25%
30%
1 2 3 4 5 6-10 11-20 21+
Policy Year
Preferred Standard Substandard
SMOKING STATUS
Smokers lapsed more often than nonsmokers at all policy durations (Figure 25). For term insurance
buyers, price is often the key consideration in the purchase and retention of a policy. It is possible
that smokers either found their policies too expensive to maintain or they may have found more
competitive smoker rates through new product offerings.
Figure 25
Term Life Policy Lapse Rates by Smoking Status
Includes 21 Companies
0%
5%
10%
15%
20%
1 2 3 4 5 6-10 11-20 21+
Policy Year
NonSmokers Smokers
29
UNDERWRITING METHOD
Looking at results by the underwriting method used, like whole life insurance, term policies with
more rigorous underwriting requirements tended to have better persistency than those issued on a
nonmedical basis (using a traditional nonmedical questionnaire with a complete set of medical
history questions) (Figure 26). Again, this is likely the result of greater focus by term insurance
buyers on price. Generally, a more thorough underwriting process allows the life insurance carrier to
offer its healthy customers the lowest prices.
Figure 26
Term Life Policy Lapse Rates by Underwriting Method
Includes 12 Companies
0%
2%
4%
6%
8%
10%
12%
14%
16%
123456-1011-2021+
Policy Year
Medical Paramedical NonMedical
30
UNIVERSAL LIFE INSURANCE
This section examines lapse experience for universal life policies issued during 2002 and earlier. As
a result, the underlying data consists mostly of traditional current assumption universal life product
designs. However, a portion of the policies in the first three policy years during the study observation
period were issued with the strong no-lapse guarantees that have become popular in the universal life
marketplace over the past several years.
Table 5 shows policy activity during the observation period for universal life plans.
Table 5
Universal Life Coverage Activity Reported During the Observation Period
Percentage of Policy Records Submitted
Termination activity Percent of Policies
Lapse for full surrender or insufficient cash value 5.1%
Death 0.7
Converted to another plan of insurance 0.0
Expiry/maturity 0.0
Remaining in force 94.2
Total 100.0%
The overall lapse rate for universal life products for all policy years combined was 5.3% on both a
policy basis and on a face amount basis. Figure 27 below shows policy lapse rates by year for
universal life plans from the 1994-1996 and 2001-2002 experience periods. With the exception of
year 1, policy lapse rates have increased from the levels seen in the mid-1990s. This is likely related
both to the increased level of new product development in the universal life market, as well as the
continued low interest environment and its impact on universal life policy cash values.
31
Figure 27
Universal Life Policy Lapse Rates
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
1 2 3 4 5 6-10 11+
Policy Year
2001-2002 1994-1996
For policies in years 1 through 10, lapse rates are lower on a face amount basis than on a policy
basis, indicating that smaller policies tended to lapse more often than larger policies (Figures 28 and
29). However, for policies in years 11 and later, the trend reverses.
Figure 28
Universal Life Face Amount Lapse Rates
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
123456-1011+
Policy Year
2001-2002 1994-1996
32
Figure 29
Universal Life Lapse Rates by Policy Size
0%
2%
4%
6%
8%
10%
12%
123456-1011+
Policy Year
Under $100,000 $100,000 and over
GENDER
Universal life policies in the current sample are distributed 65% male and 35% female by policy
count and 70% male and 30% female by face amount. The average face amount for males is
$185,000, while the average for females is $155,000. On a policy basis, rates of lapsation for female
universal life policyholders are generally higher than those of males during the first 10 policy years
(Figure 30).
Figure 30
Universal Life Policy Lapse Rates by Gender
Includes 12 Companies
0%
2%
4%
6%
8%
10%
1 2 3 4 5 6-10 11+
Policy Year
Males Females
33
However, on a face amount basis, with female policyholder’s smaller average size, women generally
had lower lapse rates than their male counterparts (Figure 31).
Figure 31
Universal Life Face Amount Lapse Rates by Gender
Includes 12 Companies
0%
2%
4%
6%
8%
10%
123456-1011+
Policy Year
Males Females
ISSUE AGE
For universal life insurance products covered by the current study, lapse rates generally decrease with
increasing issue age across all policy years. In a pattern similar to other individual life insurance
products, the exception to this is the case where the policyholder is under age 20 at issue (Figure 32).
Figure 32
Universal Life Policy Lapse Rates by Issue Age Group
Includes 12 Companies
0%
2%
4%
6%
8%
10%
12%
14%
16%
123456-1011+
Policy Year
Under 20 20-29 30-39 40-49 50-59 60 and over
34
ATTAINED AGE
As with other individual life insurance products, lapse experience is very similar on an issue age
and an attained age basis (Figure 33). In general, older policyholders have significantly higher
persistency than younger policyholders, regardless of when the policy was issued.
Figure 33
Universal Life Policy Lapse Rates by Attained Age Group
Includes 12 Companies
0%
2%
4%
6%
8%
10%
12%
14%
16%
123456-1011+
Policy Year
Under 20 20-29 30-39 40-49 50-59 60 and over
RISK CLASS
For recently issued cases (in policy years 4 and earlier during the observation period of the study),
those issued on a preferred basis exhibited lower rates of lapsation than those issued on a standard
basis (Figure 34). The trend then reverses itself for policies in years 5 and later. Universal life
policies issued on a substandard basis generally had the most favorable persistency experience.
Figure 34
Universal Life Policy Lapse Rates by Risk Class
Includes 7 Companies
0%
2%
4%
6%
8%
10%
123456-1011+
Policy Year
Preferred Standard Substandard
35
SMOKING STATUS
The universal life sample for the current study is over 90% nonsmoker and lapse rates for smokers
are significantly higher than for nonsmokers on both a policy and a face amount basis (Figure 35).
Figure 35
Universal Life Policy Lapse Rates by Smoking Status
Includes 11 Companies
0%
2%
4%
6%
8%
10%
12%
14%
123456-1011+
Policy Year
Non Smokers Smokers
UNDERWRITING METHOD
As with whole life and term insurance, universal life insurance policies issued on a nonmedical basis
exhibited higher rates of lapse than policies that underwent a more rigorous underwriting process
(Figure 36). The nonmedical category includes policies sold at the worksite or through direct
response channels. It also includes a small sample of universal life policies that were converted from
term insurance plans.
Figure 36
Universal Life Policy Lapse Rates by Underwriting Method
Includes 7 Companies
0%
2%
4%
6%
8%
10%
12%
14%
123456-1011+
Policy Year
Medical Paramedical Non Medical
36
DEATH BENEFIT OPTION
The universal life policy sample for the study is split approximately 75% level death benefit and 25%
level net amount at risk. There is little difference in lapse experience by death benefit option;
however, on a policy basis, lapse rates tended to be slightly higher for policies that had elected the
level net amount at risk (Figure 37). Experience is very similar on a face amount basis (Figure 38).
Figure 37
Universal Life Policy Lapse Rates by Death Benefit Option
Includes 8 Companies
0%
2%
4%
6%
8%
10%
123456-1011+
Policy Year
Level Death Benefit Level Net Amount at Risk
Figure 38
Universal Life Face Amount Lapse Rates by Death Benefit Option
Includes 8 Companies
0%
2%
4%
6%
8%
10%
123456-1011+
Policy Year
Level Death Benefit Level Net Amount at Risk
37
VARIABLE UNIVERSAL LIFE INSURANCE
The variable universal life insurance portion of this report is based on data submitted by six VUL
carriers. Table 6 shows policy activity during the observation period for variable universal life plans.
Table 6
Variable Universal Life Coverage Activity Reported During Observation Period
Percentage of Policy Records Submitted
Termination activity Percent of Policies
Lapse for full surrender or insufficient cash value 8.2%
Death 0.3
Converted to another plan of insurance 0.0
Expiry/maturity 0.0
Remaining in force 91.5
Total 100.0%
The overall lapse rate for variable universal life plans covered by the current study was 8.5% on a
policy basis and 8.8% on a face amount basis. Figure 39 below shows policy lapse rates by year for
variable universal life plans from the 1994-1996 and 2001-2002 experience periods. Note that lapse
rates were significantly higher during the 2001-2002 period of observation. This is likely the result of
the poor equity market performance and continual volatility of returns over the observation period of
the current study. Many policyholders had become disillusioned with variable products after seeing
their account values plummet. And, in the case of variable universal life plans, in many instances,
additional unplanned premium payments were required to keep policies in force.
38
Figure 39
Variable Universal Life Policy Lapse Rates
0%
2%
4%
6%
8%
10%
12%
14%
123456-1011+
Policy Year
2001-2002 1994-1996
Rates of lapsation for variable universal life plans were generally lower on a face amount basis than
on a policy basis — indicating a tendency for smaller policies to lapse (Figure 40).
Figure 40
Variable Universal Life Face Amount Lapse Rates
0%
2%
4%
6%
8%
10%
12%
14%
123456-1011+
Policy Year
Policy Count Face Amount
39
GENDER
Variable universal life policies in the current sample are distributed 60% male and 40% female by
policy count and 66% male and 34% female by face amount. The average face amount for males is
$225,000, while the average for females is $180,000. In contrast to universal life insurance
experience, on a policy basis, rates of lapsation for male variable universal life policyholders are
generally higher than those of females for all policy years (Figure 41). And, with the exception of
policies in force for longer than 10 years, the same relationship is seen on a face amount basis
(Figure 42).
Figure 41
Variable Universal Life Policy Lapse Rates by Gender
Includes 6 Companies
0%
2%
4%
6%
8%
10%
12%
14%
123456-1011+
Policy Year
Males Females
Figure 42
Variable Universal Life Face Amount Lapse Rates by Gender
Includes 6 Companies
0%
2%
4%
6%
8%
10%
12%
14%
1 2 3 4 5 6-10 11+
Policy Year
Males Females
40
ISSUE AGE
As with other permanent individual life insurance products, variable universal life insurance lapse
rates are highest at issue ages 20-29 and lowest at issue ages over 60 (Figure 43).
Figure 43
Variable Universal Life Policy Lapse Rates by Issue Age Group
Includes 6 Companies
0%
5%
10%
15%
20%
123456-1011+
Policy Year
<20 20-29 30-39 40-49 50-59 60 and over
ATTAINED AGE
We see a similar pattern of lapse by policy year and attained age (Figure 44).
Figure 44
Variable Universal Life Policy Lapse Rates by Attained Age Group
Includes 4 Companies
0%
5%
10%
15%
20%
123456-1011+
Policy Year
<20 20-29 30-39 40-49 50-59 60 and over
41
RISK CLASS
The variable universal life policies in the current study are approximately 10% preferred and 90%
standard or substandard by underwriting category. Like universal life, lapse rates for variable
universal life insurance policies issued on a preferred basis are lower than lapse rates for policies
issued on a standard basis at most policy durations (Figure 45).
Figure 45
Variable Universal Life Policy Lapse Rates by Underwriting Class
Includes 6 Companies
0%
2%
4%
6%
8%
10%
12%
14%
16%
123456-1011+
Policy Year
Preferred Standard
SMOKING STATUS
Approximately 15% of variable universal life policies in the current study were issued with smoker
rates, while 85% were issued on a nonsmoker basis. Like traditional universal life insurance, for
variable universal life products, lapse rates for smokers are higher than nonsmokers (Figure 46).
Figure 46
Variable Universal Life Policy Lapse Rates by Smoking Status
Includes 5 Companies
0%
2%
4%
6%
8%
10%
12%
14%
16%
1 2 3 4 5 6-10 11+
Policy Year
Non Smokers Smoker
42
PREMIUM PERSISTENCY EXPERIENCE FOR
FLEXIBLE PREMIUM PRODUCTS
For universal life and variable universal life plans, which allow for flexible premium payments,
product profitability is impacted by both the rate of surrender or lapse, as well as the premium
persistency and cash flow patterns. Six participating carriers were able to provide data to support a
review of premium persistency for universal life and variable universal life products.
This section of the report will examine the following premium persistency measures for UL and VUL
plans:
• Premium Payment Ratio
• Excess Premium Ratio
• Total Premium Collections Growth Ratio
These measures are defined and discussed in detail in the LIMRA report Universal Life: A New
Approach to Measuring Premium Persistency (1985).
PREMIUM PAYMENT RATIO
The premium payment ratio measures the rate of premium payment up to the planned level on only
those policies that are in force at the end of the observation period. Premium payments are calculated
at the individual policy level and can be used to determine where lapses are likely to occur in order to
help companies design and focus their conservation efforts. Policies that pay smaller percentages of
the planned premium than in prior years may be close to lapse or surrender. The rates could either be
tracked for an entire block of business or at the individual policy level.
Premium payment ratios for flexible premium products are shown in Figure 47 below for both the
current study and an earlier study that LIMRA published in 2001. Note that premium payment ratios
have increased somewhat for business in the first three years, but have decreased overall for policies
that are in years 4 and later. This may be due at least in part to the fact that the majority of business
underlying both samples is universal life. This business includes some of the newer UL plans sold
with strong no lapse guarantees. In order to maintain the death benefit guarantee, policyholders are in
essence required to make payments at or above the no-lapse premium level. And, since the
guaranteed premium level is often higher than the minimum premium or billed amount, this may
have contributed to some of the increased funding in the early durations. In addition, it should be
noted that, since these two samples do not represent an identical group of contributing companies,
some differences are due to variations in individual carrier experience.
43
Figure 47
Premium Payment Ratios
Flexible Premium Products
0%
20%
40%
60%
80%
100%
123456-10
Policy Year
2001-2002 1995-1996
Males generally paid a greater portion of the planned premium than females did during the
observation period of the current study (Figure 48).
Figure 48
Premium Payment Ratios — Males versus Females
Flexible Premium Products
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
123456-10
Policy Year
Males Females Total
44
And, looking at all policy years combined, premium payment ratios increase with age at issue until
about age 55 when they begin to fall off again (Figure 49).
Figure 49
Premium Payment Ratios — By Issue Age Group
Flexible Premium Products
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Under 20 20-29 30-39 40-49 50-59 60 and older
EXCESS PREMIUM RATIO
Excess premiums are defined as any amounts paid into a universal life or variable universal life
policy greater than the planned premium for a given policy year. For policies in their first year,
excess premiums often stem from cash value rollovers due to internal or external replacements. In
renewal years, policyholders may “dump in” additional premium in order to take advantage of
competitive credited rates or favorable market returns. Or, as in recent years, additional premium
payments may be required to keep the policy in force during market downturns. The excess premium
ratio is equal to the ratio of excess premiums collected for the given policy year to expected planned
premiums for that year.
Figure 50 shows excess premium ratios for flexible premium products in the current study, as
compared to rates experienced during the mid 1990s. Note that excess premium rates have increased
significantly, especially in the early policy years. And, as in past studies, the vast majority of excess
premium is paid during the first few policy years. As mentioned earlier, the majority of policies
underlying these results are universal life plans. And, during the observation period of the current
study, there was a good deal of replacement of existing universal life and variable universal life
policies with updated and more competitive product designs, which may explain some of the
increased excess premium in early durations.
45
Figure 50
Excess Premium Ratios
Flexible Premium Products
0%
20%
40%
60%
80%
100%
120%
140%
160%
1 2 3 4 5 6-10
Policy Year
2001-2002 1995-1996
For the policies underlying the current study, excess premium ratios increased significantly with
increasing age at issue (Figure 51). Although premium payment ratios fall off for issues ages over 50,
excess premium ratios continue to increase. This is due to the fact that calculations are made at the
individual policy level and then aggregated and the largest deposits of excess premium tend to be
made by older buyers likely through rollovers from existing plans.
Figure 51
Excess Premium Ratios — By Issue Age Group
Flexible Premium Products
0%
20%
40%
60%
80%
Under 20 20-29 30-39 40-49 50-59 60 and older
46
TOTAL PREMIUM COLLECTION GROWTH RATIO
The final cash flow measure to be discussed is the total premium collection growth ratio, defined
as the ratio of the premiums collected in the current policy year to the premiums collected in the
previous policy year. Note that, in line with experience on planned and excess premium payment
ratios, total premium collection ratios have increased since the mid-1990s (Figure 52). For the six
companies that provided data for the study of premium persistency experience, total premium
collection for the current year now exceeds amounts collected in the prior year for most policy
durations.
Figure 52
Total Premium Collection Growth Ratios
Flexible Premium Products
0%
20%
40%
60%
80%
100%
120%
140%
23456-10
2001-2002 1995-1996
Overall, year over year premium collections generally decrease with increasing age at issue and this
pattern is consistent across all policy years (Figure 53).
Figure 53
Total Premium Collection Growth Ratios — By Issue Age Group
Flexible Premium Products
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Under 20 20-29 30-39 40-49 50-59 60 and older
47
PARTICIPATING COMPANIES
Amerus
CNA
Equitable Life Insurance Company
Farm Family Life
Federated Life
Government Personnel Mutual Life
Guardian Life Insurance Company of America
Hartford Life
Horace Mann
Liberty Mutual Life
Manulife
MassMutual
MetLife
MONY
New York Life
Northwestern Mutual Life
Phoenix Life
Prudential
SunLife
TIAA-CREF
Travelers Life and Annuity
USAA
48
RELATED LINKS
The following links are valid as of 12/31/05.
LIMRA
Individual Life Insurance Persistency (2001)
This study examines individual life insurance persistency experience for 13 participating U.S.
companies. The report provides lapse rates separately for traditional whole life, term, universal life,
and variable universal life products. Lapse results are reviewed for a variety of policy and product
features, which explains some of the variations in experience from one study period to the next.
http://www.limra.com/members/abstracts/3506.aspx
Finding New Customers: Who is Buying Individual Life and Why? (2005)
This report is the first in a series of reports exploring the attitudes and opinions of recent individual
life buyers. It defines the differences in the wants and needs of buyers of different age and income
groups. It explores why consumers from different backgrounds buy insurance, what they are looking
for in a policy and how this shapes the type of product they buy.
http://www.limra.com/members/abPdf/4909.pdf
A Universal Challenge: The Future of Flexible Premium Products (2005)
This report presents an overview of the market for universal life (UL) and variable universal life
(VUL) products based on data collected from 26 companies representing nearly 70% of the UL and
VUL sales in 2004 and supplemented by data from LIMRA's Individual life Insurance Sales survey.
Trends in product design, distribution, sales results, and producer compensation are examined.
http://www.limra.com/abstracts/4943.asp
US Individual Life Insurance Sales, 2005 3rd quarter (2005)
This report tracks individual life insurance sales results measured by annualized premiums, face
amount, and number of policies, with results reported separately for various distribution systems.
Contributors include 76 U.S. companies and their 83 subsidiaries. The study tracks separate data for
individual products such as universal life, term, variable life, variable universal life, survivorship life,
and whole life. The survey also tracks universal life interest-rate data.
http://www.limra.com/members/abPdf/4894.pdf
49
US Individual Life Insurance Sales Trends, 1975-2004 (2005)
This report provides industry estimates of individual life insurance sales results measured by
annualized premiums, face amount, and number of policies.
http://www.limra.com/members/abPdf/1746.pdf
US Long-Term Care Insurance Persistency Experience (2004)
This report represents the first study conducted jointly by LIMRA International and the Society of
Actuaries (SOA) Long-Term Care Experience Committee that focuses on long-term care insurance
(LTCI) persistency. The study examines voluntary lapse and total termination activity for calendar
years 2000 and 2001. Overall, the results indicate that LTCI persistency has continued to improve;
however, the current improvement seems to be coming from the individual lines of business rather
than the group lines.
http://www.limra.com/members/abPdf/4482.pdf
Individual Disability Income Insurance Lapse Experience (2004)
This report examines individual disability income lapse experience including both guaranteed
renewable and noncancelable business. Eight of the major individual DI writers submitted data
representing experience for years 1999 through 2001.
http://www.limra.com/members/abPdf/4661.pdf
Non-LIMRA
1984-2001 Long-Term Care Experience Committee’s Intercompany Study
Based on data from twelve participating companies, this report represents the first study of lapse
experience for Canadian Universal Life Level Cost of Insurance plans.
http://www.soa.org/ccm/content/areas-of-practice/special-interest-sections/long-term-care-
insurance/actuarial/papers-presentations-research-resources/1984-2001-long-term-care-experience-committees-
intercompany-study/
