Only a small percentage of term life insurance policies ultimately pay out a claim. Approximately 1% of all term life insurance policies pay out. This means that a significant majority—99%—of term policies never result in a claim payment.
Why Do Most Term Policies Not Pay Out?
The primary reason for the low payout rate is that most people let their term life insurance policies lapse. A policy lapses when the policyholder stops paying premiums, causing the coverage to terminate without a payout. This can happen for various reasons, including:
- Changes in Financial Circumstances: Policyholders may find premiums unaffordable over time.
- Evolving Needs: As families grow, children become independent, or major debts are paid off (like a mortgage), the perceived need for life insurance may diminish.
- Forgetfulness or Lack of Engagement: Policyholders might simply forget about the policy or not actively manage it.
- Inflation's Impact: While not a direct cause of non-payout, the eroding value of the death benefit due to inflation can make the policy seem less valuable over time, potentially contributing to a decision to let it lapse. For instance, a $250,000, 20-year term policy could lose 56% of its real value over that period if inflation averages 4% annually.
Understanding Policy Lapses vs. Payouts
It's crucial to distinguish between a policy lapsing and a policy paying out. A payout only occurs if the insured person passes away while the policy is active.
| Outcome | Percentage | Primary Reason |
|---|---|---|
| Policies That Pay Out | 1% | Policyholder passes away |
| Policies That Do Not Pay Out | 99% | Policy lapses or expires |
Maximizing Your Term Policy's Potential
Given that most term policies do not pay out, it's important for policyholders to strategically manage their coverage to ensure it serves its purpose.
Here are some practical insights:
- Assess Your Needs Carefully: When purchasing, select a policy length (term) and coverage amount that aligns precisely with your financial obligations and dependents' needs for the foreseeable future. Avoid over-insuring or under-insuring.
- Regularly Review Your Policy: Life circumstances change. Review your policy every few years, or after significant life events like marriage, divorce, birth of a child, or a major purchase (e.g., a home).
- Understand Renewal and Conversion Options: Be aware if your policy has guaranteed renewability (often at a higher premium) or the option to convert to a permanent life insurance policy without a medical exam.
- Set Up Automatic Payments: To prevent accidental lapses due to forgotten payments, utilize automatic bank drafts or credit card payments.
For more detailed statistics and insights into life insurance, you can refer to reputable sources:
