06Jun2011
Author
mboot
Category
Life

The term vs. permanent life debate

by Mike Boot, Managing Director of Actuarial Marketplace Solutions

MikeBoot As an actuary on the staff of the Society of Actuaries, I am usually happy to see insurance topics with actuaries quoted in the Wall Street Journal. I was surprised to see the May 28, 2011 article “Honestly, What’s the Best Policy: Insurance Agents Are Pushing Pricey Permanent Life Aggressively. Here’s What You Need to Know” written by Leslie Scism.

The article provided information that often has been cited previously by popular TV financial advisors who follow the traditional “buy term and invest the difference” maxim. I have always felt it is very difficult to generalize that one product design is better under all scenarios and for all personal circumstances. I really wish that the author had done more homework on the latest developments in product design and talked to more actuaries. There are interesting developments in the Universal Life with Secondary Guarantees and Universal Term products that could have been addressed.

The article references the Society of Actuaries and LIMRA lapse study which showed about a quarter of the whole-life policies lapse in the first three years. The article seems to imply that all those lapses are gains to the insurer. The article could have provided more insight by asserting that insurers must assume certain lapses in their pricing assumptions to remain competitive, that not all permanent products are necessarily lapse supported, and that there are forces such as life settlements that are changing the lapse rate assumption going forward.

I am interested in your thoughts as an actuary on this article and how the Society of Actuaries can provide more research that could shed more insight on this issue. You can share your comments below.

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Discussion

One response to "The term vs. permanent life debate"

  • Tom Bakos says:

    Mike:

    I don’t believe that more “research” by actuaries is needed to address this issue. Can’t we address it with what we already know?

    It seems to me that what we need to do is create a report or “study note”, so to speak, designed for public consumption (i.e., not too technical) which discusses insurance mortality risk and the various ways (e.g., term vs. permanent) that such mortality risk can be financed.

    Clearly, the expenses incurred by any insurance company offering insurance products must be considered and, to the extent that such expenses are in excess of early premium revenue received, a discussion of lapse risk (both to company and insured) and its effect on insurance pricing should be included.

    Typically, the term vs. permanent argument comes down to a comparison of agent compensation and how that expense item is recovered through the premium. In addition, of course, there is the classic argument centered on a term vs. a permanent need for insurance. Any article that analyzes the differences between term and permanent and provides advice only in terms of short term cost implications is as unbalanced as an agent who sells permanent over term because he or she gets paid more.

    The article you reference only describes permanent lapes rates. But, we know that term lapse rates, generally, are even higher. So, someone who pays for a 20-year level premium term policy and lapses it after 3 years has also paid more than needed to be paid vs. an ART form. Clearly, buyers of term as a class are different from buyers of permanent as a class.

    So, what I think, is that the SOA ought to produce a report in keeping with the profession’s mission to serve the public (among others) that can be viewed as the definitive document on life insurance products. Besides simply explaining the differences between term and permanent, perhaps it also ought to address all of the new developments in product design as you mentioned – including variable, equity indexed, the meaning and effect of guarantees of all sorts, etc.

    I think we can do that with what we already know.

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