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?