Lapse

The policy <Universal Life> 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 - SOA - Universal Life (RSA81V7N412), Society of Actuaries - 16p

  • 1951 - SOA - Lapse Rates, Society of Actuaries - 59p
  • 1979-1, NAIC Proceedings - Report to the NAIC by the Industry Advisory Committee on Policy Lapsation - December 1978
  • 1981-2 - AAA (American Academ of Actuaries) to NAIC Task Force on Manipulation, Lapsation, Dividend Practices and Annuity Disclosure - re: Report of the Committee on Dividend Principles and Practices - ATTACHMENT ONE-B - (p732-734) - 3p
  • 1981-2, NAIC Proceedings - Attachment ONE-A1 Advisory Committee on Policy Lapsation June, 1981 Proposed Lapse Disclosure System - Feasibility Test and Procedures - (p649-731)
  • 1984 - SOA LIMRA - 1985-86 Long-Term Ordinary Lapse Survey in the United States.

    , Society of Actuaries - 14p

  • 1995 - SOA - 1993-94 United States Lapses by Duration and Product Line: Long-Term Ordinary Lapse Survey*, Society of Actuaries - 26p

  • 2013 - SOA - Life Insurance Regulatory Structures and Strategy: EU Compared with US - 92p

  • 2013 - AP - Life Insurance Lapse Behavior, Stephen Fier and Andre Liebenberg, North American Actuarial Journal, 2013, vol. 17, issue 2, 153-167

    • Life insurance policy lapses are detrimental to issuing insurers when lapses substantially deviate from insurer expectations.
  • 2020 - AP - Estimating Extreme Cancellation Rates in Life insurance - 31p
  • 2014 - AP - On Lapse Risk Factors in Solvency II - 79p

SOA - 

Legal Cases - 
-Johnston v Conseco
-Smith v 
-Maloof v 

LIMRA Quiz 

  • (a) Mr. Bruce E. Shepherd, Executive Vice President, Life
    Insurance Association of America, presented a resolution
    to the committee recommending that policyholders should not surrender or lapse an existing policy of permanent life insurance and replace it with new life insurance.
  • A copy of the resolution is attached.

1961-2, NAIC Proceedings

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

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

  • 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.  (p48)

2014 - SOA - Modeling of Policyholder Behavior for Life Insurance and Annuity Products, Society of Actuaries - 92p

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 - 83p

Universal life insurance is more flexible than whole life.

  • You can change the amount of your premiums and death benefit.
    • But any changes you make could affect how long your coverage lasts.
    •  If your premiums are lower than the cost of insurance, the difference is taken from the cash value. If the cash value reaches zero, your policy could lapse.
  • The company will send you a report each year showing your cash value and how long the policy might last.
  • The estimate is based on the cash value amount, the cost of insurance, and other factors. Review it carefully.
  • You might need to pay more in premiums to keep the policy in effect until the maturity date.

https://tdi.texas.gov/pubs/consumer/cb018.html

  • To:  The NAIC Life Insurance (C3) Cost Disclosure Task Force
  • From:  The American Council Of Life Insurance <ACLI>
  • Date:  May 25, 1979
  • Re:  The Report of the Industry Advisory Committee on Policy Lapsation

1979-2, NAIC Proceedings

  • Commissioner Huff was appointed as Chairman of a new task force on life insurance policy lapsation.
  • The task force was charged with the responsibility of identifying specific problems involved and seeking solutions to the problem of life insurance policy lapsation.

1976-4, NAIC Proc

  • <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 0710 and 1017 - GOV (Senate) - FTC Study of Life Insurance Cost Disclosure - Senator Cannon - [PDF-592p]

  • It is important to understand the various ways in which life-insurance policies are terminated. (p4287)
  • From the policyholder's point of view, terminations by death, by disability, by maturity, represent satisfactory completions of the insurance contract…. (p4287)
  • It is a generally recognized fact that the great bulk of life insurance terminates in a manner that cannot be regarded either by the companies or by the policyholders as entirely satisfactory. (p4287)
  • A great deal of insurance terminates within a short time after it is sold, by reason of the failure of the insured to keep up the payments of his premiums. (p4287) 
  • Let me repeat that because it is very important:   When such failure to maintain premium payments occurs before the policyholder is entitled to a refund of any portion of the reserve against his policy, the insurance is said to have terminated by lapse. (p4287) 

-- Dr. Davenport - <SEC>Securities and Exchange Commission, special economic consultant - insurance section

1939 - GOV - INVESTIGATION OF CONCENTRATION OF ECONOMIC POWER (TNEC) - PART 10-10 A: LIFE INSURANCE

I think, overall the data reflect that too many consumers are making a hasty purchase and then just dropping their policies—up to 20 percent in 1976, and double the rate of 1951.

  • Considering the fact that Consumer do not get good cost information, we could hardly say that it was due to the fact that they are discovering lower cost policies.
  • I have seen no one claim that that is the reason for the increase in the termination rate.

--  Richardson, Lee, Acting Director, U.S. Office of Consumer Affairs, Department of Health, Education, and Welfare .

1978 12 - GOV (House Report) - Life Insurance Marketing and Cost Disclosure Report Together with Dissenting Views - [PDF-106p]

NAIC Working Groups

  •  ACLI Letter
  • -LIBG - Current, versions 198x v 199x, -LIMRA
  • 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.

--  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