How about only 1% of term policies will ever pay out...Whose making the insurance companies rich?

Question

lets hear some feedback. Considering even the worst insurance companies out there are able to sell term but only 3 have a decent whole life product.

Answer 1

Be frankly,It is gonna take a while to find the answer for your question.Try the resource here for reference.http://insurance.free-onlinetip.info/ins...

Answer 2

You are comparing apples and oranges.

Whole Life insurance is basically a term life policy plus a "savings" account that is controlled by the insurer.  The cost of whole life is much higher than term since you are paying for a term policy plus adding value to the 'savings account' (the 'savings' account is what increases in value over the life of the policy).  With whole life, you pay a huge amount in commission in the first few years of the plan, so your 'savings' account does not increase very much during this time.

Term life in no way guarantees payout (unless you die during the policy period), it is only an insurance policy - if you cease making payments, your coverage ends.  The cost of term life is way less than whole life since all you are paying for is the insurance, not adding to a supposed 'savings' account with the insurer.

So, who is making the insurance companies richer?  Term or whole life?  I would say whole life - since you are handing over a lot more money to the insurer which the insurer gets to use while paying fairly poor rates of return on the 'savings' account.

Answer 3

Aaron - The 1% thing has come from several studies like the one done by Peachtree Planning Corp in 2002 that shows that less than 1% of term life insurance polies stay inforce for 20 years.  Term expires at age 80 and gets very expensive, so if you don't cancel it, it will cancel it's self, which accounts for a large portion of policies that are paid into and no claim ever paid out.  Some also convert it as well and you don't get any 'credit' for all the years you put into the term policy either.

I think it's really a mix of both.  Term policies are very profitable because there is such a low amount that ever needs to get paid out.

While whole life policies cost more in premium, I would assume the claim payout rates are closer to the 90% range seeing as it doesn't expire and once it's set up, the only times it would really not pay out is if someone cancels it, the person dies under the circumstances relating to an exclusion (IE: dying while commiting a crime or commmiting suicide in the first 2 years of the policy) or there is something fraudulant about the application to begin with.

Which is more profitable is a tough question, but I would definately say the companies that are only offering term are the most profitable by % compared to their client size.  They pull in all those premiums and almost never pay out...even if term is cheaper, the profit margin is huge!

Answer 4

Insurance companies have the law of large numbers on their side.  Individuals don't.  If an individual wants to exchange a specific dollar for an uncertain future, that's up to them.  I think we all know term insurance is cheap because the insured peril is unlikely to happen during the specified time.  Where'd you get the 1% figure?

I'm not sure what your angle is on the whole life policies, Thomas.  I wonder which three companies and what makes the PRODUCT so much better than similar products offered by other companies.

edit: Okay, the Peachtree study actually references a LIMRA study, but doesn't offer a proper reference to that study.  I'm sure the 1% includes policyowners who also converted to permanent plans.  I'd be interested to see a similar study on permanent lapse ratios.  I'm guessing it's less than 90%, especially if you start counting term riders sold in blended policies.  Most of the permanent policies I come across are not in great shape.  With changing dividends, interest rates, and mortality costs, many do not just run on automatic.