Actuarial news and views from Cape Town and beyond

Let them lapse?


We often view withdrawal experience as a risk and fear the negative impacts it has on insurance. However, there is a large proportion of senior citizens in America lapsing on their life insurance policies and thus creating a great positive effect on the books of life insurance firms.

What is the reason for these withdrawals? Many senior citizens either can no longer afford to pay for the cover or no longer see a need for the cover. They then lapse or surrender their policies without considering the alternatives.

An alternative would be to reduce the value of their policy and thus lower the strain of premiums or get some level of assistance from their family members who are usually the beneficiaries of such a police. They could also wind-up their policy.

Another lucrative alternative in the US is the option of selling the product to a third party, referred to as a Life Settlement. This gives the policyholder the option to sell the policy to another party at a value greater than the surrender value but less than the death benefit.

Although these alternatives exist, there is still a high rate of lapsing. The reason for this being that the senior citizens are not educated about their alternatives. So the question comes in: is it the life insurers responsibility to educate the senior citizens about their options?

From a profit point-of-view, it is not in the interest of a life insurer to educate their policyholders of the options as a lapse or surrender of such a policy will benefit them. In fact some insurers have been known to fire agents for offering these senior citizens the advice and information that would lead them to choose not to surrender their policy. But what about the ethics? Is it not unethical to watch a person lose out even though it benefits you? As insurers with all the knowledge, it seems very unfair and perhaps even borders exploitation.

Is it fair to let them lapse?

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11 thoughts on “Let them lapse?

  1. I think that the ideas behind TCF should mean that at the very least there should be a rule that customers are presented with the alternative options to lapsing their policies. However this could have a big effect on future profits if premiums are guaranteed and lapse rates change substantially from what was assumed about them when pricing.

  2. What implication would this product have on the public? (Family, children, independents) – Group 4
    As stated in that article, this would have a negative impact on the public especially the poor and senior citizens because they are the most likely to lapse a policy rather than using alternatives due to being uneducated on the alternatives.

  3. What would be the implication of this product on the public?
    This would have as mentioned in the article a negative impact on the public, especially the poor and senior citizens as they are the most likely to lapse a policy due to being uneducated on alternatives. The individual ends up with no cover (despite having paid premiums) in the event of a lapse when alternatives exist. Insurers really need to do better with regard to giving information to clients – TCF thus seems essential to the fairness of the process

  4. How ethical is life settlement and should it be allowed:

    A life settlement is purely voluntary and is a way for policyholders to get a benefit from an insurance policy they no longer want. It represents a way to accelerate the death benefit on policies which don’t offer that option and could be useful in the case of critical illness, by providing individuals with benefits when they may need them most…

  5. Will an insurer give appropriate advice to policyholders?

    There should be regulation on the information provided to policyholders stating what should be made known. This regulation might not imply that advice should be given, hence the insurer will not be obligated to give advice. The insurer could even benefit if the insurer does not give appropriate advice. It can be concluded that there are no requirements for the insurer to advise the policyholders however it should be encouraged.

  6. Should the lapsing occur before the insurer can recover the initial expenses relating to the policy, the insurer will sustain a loss on the policy. This is likely to encourage anti selection, as the insurer will look to the older policies to make up this deficit.

    Also, this practice of non disclosure practiced by the insurer is likely to set an unethical trend amongst other insurers.

    There should be regulatory requirements imposed on the insurer to make sure that policy holders are fully educated about their policy and the options available to them. This will contribute to avoid unethical and manipulative practice.

  7. How ethical is Life settlement? Should it be allowed?

    The policyholder voluntarily decides to enter into the contract. The reduced benefit is received earlier. The initial reason the policyholder got the cover was to lessen the finincail burden for the dependents and this may mean the dependents may not be able to provide for themselves (if the policyholder receives an earlier but smaller benefit. The policyholder may use the benefit to satisfy his wants and needs before his death and nothing would be left for the dependents.

    Is it ethical for insurers to let senior citizens lapse rather than inform them of alternatives? No, it would be important to give them other options as some of them may not be as financially astute as other age groups and some them may have contributed to the insurer for a relatively long time

  8. I think there should be legislation that enforces the insurance companies to educate the senior citizens on lapsing vs surrendering. It is unethical to not educate them and let the citizens lapse their policies in order for the insurance company to have a positive effect on their books.

  9. In terms of whether it is ethical to allow pensioners to lapse – I believe that pensioners need to be informed of the implications of lapsing. The article mentions that employees were fired for informing pensioners of the relevant implications. Regulation preventing this should be enforced and could possibly be included as a component of Treating your Customers Fairly (as mentioned in lectures). This regulation should possibly detail the manner in which information should be presented.

  10. Will an insurer give appropriate advice to policyholders?

    The insurer is unlikely to promote early lapses because the life insurance policies, during their late stages, are subsidising new business. If this practice is encouraged, business strain will have to be funded from the insurer’s capital instead. The lapses, although individually profitable to the insurer, will result in negative financial consequences on a big scale. The insurer will also not encourage the practice because the policies were initially sold to provide for the insurer’s dependencies, changing the stance will raise question’s about the insurer’s interests.

    Sale to third parties
    It is not against the insurer’s interest for the policies to be sold to a third party such as a Life Settlement because, from the perspective of the insurer, the cashflows from the policy will be similar in any case. However, there is a potential operational risk with this practice as it raises the question of insurable interest of the third party. A higher incidence of claims on policies sold in this secondary market will result if these third parties accelerate the claims by assassinating the original policyholders.

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