Lapse

Lapse

1982-2 525

ACLI Letter

4. Another recent marketplace phenomenon has been a sharp increase in replacement activity, with indications that perhaps half of all lapses involve replacement situations. The revised NAIC Life Insurance Replacement Model Regulation adopted in 1978 is based on a recognition that a replacement is not necessarily disadvantageous to a policyholder, i.e., some replacements are well-justified and definitely in the consumer’s interest. One can see the

SOA – 

Legal Cases – 
-Smith v 
-Maloof v 

LIMRA Quiz 

“The policy does not lapse if a premium is not paid; rather, it lapses if the fund balance becomes too small to pay the next month’s cost of  insurance.” –Ben H. Mitchell

1981 – Universal Life, Society of Actuaries

<Senator Cannon> “The CHAIRMAN:  So that the first 13 months is the highest?”
<FTC>  “Mr. LYNCH: The 13-months-lapse rate is typically the highest, and it’s about 20 percent or so.”

1979  – GOV – FTC STUDY OF LIFE INSURANCE COST DISCLOSURE Hearing 

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Definition of “Lapse”

• There is a wide variety of definitions of lapsation in existence in the insurance industry today.
• This variation is bound to increase over the next few years as traditional products become superseded by new flexible products with indexed protec­tion, stop and go features, and other flexible options, and as companies define lapse on these products without respect company industry standards.

For traditional life insurance products, the interest in lapsation is usually in premium-paying policies.

In this case, lapsation is often considered to be the cessation of premium payments for any reason other than death, maturity, expiry, transfer to an automatic premium loan status, or reaching the end of the stipulated premium-paying period.

1981-2, NAIC Proceedings

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“4. Another recent marketplace phenomenon has been a sharp increase in replacement activity, with indications that perhaps half of all lapses involve replacement situations.

The revised NAIC Life Insurance Replacement Model Regulation adopted in 1978 is based on a recognition that a replacement is not necessarily disadvantageous to a policyholder, i.e., some replacements are well-justified and definitely in the consumer’s interest.”

—  ACLI Letter
1982-2  NAIC Proceedings 

 

NOW

NAIC Working Groups

– ACLI Letter – 

-LIBG – Current, versions 198x v 199x, -LIMRA

Outside of NAIC Working Group

Academic 
“Life insurance is a large yet poorly understood industry. Most policies lapse before they expire.”
2013, AP Lapse-Based Insurance, Daniel Gottlieb and Kent Smetters

Actuarial
“Policy lapses and surrenders are an interesting behavior as it can either be a conscious decision to surrender a policy, a forced decision driven by cash needs, or a failure (conscious or not) to pay the required premiums to keep a policy inforce.”   Modeling of Policyholder Behavior for Life Insurance and Annuity Products, Society of Actuaries, 2014

Old Stuff

The experience of most companies shows that about  one half of the policies lapse within ten years from the date of their issue; and probably not more than one-quarter of the policies issued in any year will be in force at the end of twenty years.
E. W. PEET, SECRETARY OF THE NATIONAL LIFE
INSURANCE COMPANY OF THE UNITED STATES.
1871-1, NAIC Proc (FKA National Insurance Convention) -Touching the vexed question of ” lapses,” much comment has been made, and no doubt some abuse of the business is indicated by the immense volume of policies returned as lapsed; but it is a difficult point to deal with.
-There is a large percentage of waste in all human effort, and even in oil natural movement Lapses unhappily prevail even in religious affairs, and some of the seed grain is wasted by the most careful sower.
-You must be careful how you pull up the tares in the life insurance field, lest you destroy the whole crop.

—  Mr. J. B. Ecclesine, editor of The New York Underwriter

1871-2, NAIC Proceedings

In regard to this matter of dividends, every member of this convention is aware of the immense profits made by companies from lapses; and from that source many of the companies have been able to make dividends.

…. I think with Mr. Paine, of Maine, that the time has come, when some measures should be adopted to prevent this wholesale slaughter of policies of life insurance.   —  Mr. Clarke

1871-2, NAIC Proc