Life Insurance Lapse Behavior

Fier, Stephen G.; Liebenberg, André P.

doi:10.1080/10920277.2013.803438

Cited by 43 publications

(35 citation statements)

References 25 publications

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“…Recently, a large literature has discussed the driving factors for surrender behavior, including Fang and Kung (), Fier and Liebenberg (), and Gottlieb and Smetters (). These authors document the dominating role of income shocks in encouraging people to surrender their life insurance policies.…”

Section: Introductionmentioning

confidence: 99%

Life Insurance Demand Under Health Shock Risk

Hambel¹,

Kraft²,

Schendel³

et al. 2016

J of Risk & Insurance

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We analyze a family's term life insurance demand in a life cycle portfolio choice model. A major source of risk for a family is the early death of the sole wage earner. To hedge this, the family in our model can contract a term life insurance. Most existing papers studying the life insurance demand consider short term contracts that can be bought or sold continuously which ensures an optimal insurance holding at each point in time. This simplification might crucially affect the results. Therefore, we focus on a model where the family can choose between different long-term contracts that differ with respect to their insurance sum. The annual insurance premium includes fees for administrative costs and transaction costs. A belated change of the insurance is costly for the family and only possible as long as the insured person is younger than a specific age and healthy. The wage earner faces stochastic mortality risk with a jump component that we interpret as critical illness. Once the agent suffers from a critical illness, the family cannot change the insurance contract any more, the income of the family reduces, and the mortality risk increases. If the wage earner dies before the maturity of the insurance contract, the remaining family members receive a single, fixed payment of the insurance company. We use a German life table to calibrate the mortality process, German cancer data to calibrate the critical illness shock and data of the German life insurance industry to calibrate the insurance fees. The insurance premiums are calculated such that the contracts are actuarially fair.The realistically modeled insurance induces new qualitative effects that are important for the optimal decisions over the life cycle. The long-term insurance contract amplifies the effect of negative labor income shocks, since in the undesired case of a negative labor income shock a premature termination of the contract or a reduction of the insurance sum leads to additional losses. In an already bad state, the family has problems to make the premium payments. Families with a lower income volatility have a significantly higher insurance demand. The amplifying effect also reduces the insurance demand of families that are more risk averse. In general, the families increase insurance protection over the life cycle. The long term contract design effect fades away as agents get older, since the contract duration and human wealth uncertainty reduce. Most importantly, young families do not buy any long-term term life insurance. If an older agent suddenly dies, the accumulated financial wealth and contracted insurance ensures that the surviving family member can maintain their consumption level, although consumption growth is reduced. By contrast, an unexpected death in younger years leads to severe problems for the family.Our results are robust to adding short-term insurance, annuities, or health insurance. For instance, if families have also access to short-term insurance, they buy these contracts at a young age without demanding long-term ins...

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Section: Introductionmentioning

confidence: 99%

Life Insurance Demand Under Health Shock Risk

Hambel¹,

Kraft²,

Schendel³

et al. 2016

J of Risk & Insurance

View full text Add to dashboard Cite

show abstract

“…The other rationale for a change in life insurance is that a different life insurance contract would fit the changing bequest needs of the individual. This has been labeled “the policy replacement hypothesis” by Fier and Liebenberg (), who show that both hypotheses have empirical relevance . Our analysis of long‐term contracts works well for the policy replacement rationale, but not for the emergency fund rationale, as we explain in the “Discussion and Extensions” section.…”

Section: Introductionmentioning

confidence: 99%

“…While the last of these events supports the emergency fund hypothesis, the first three are supportive of the policy replacement hypothesis. Fier and Liebenberg (), on the basis of a different data set of Americans over the age of 50, show that the determinants of lapse behavior change with the policyholders’ age. For instance, a recent divorce is a significant determinant of lapse decisions only for the younger households in their sample.…”

mentioning

confidence: 99%

Uncertain Bequest Needs and Long‐Term Insurance Contracts

Fei¹,

Fluet²,

Schlesinger³

2013

J of Risk & Insurance

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We examine how long-term life insurance contracts can be designed to incorporate uncertain future bequest needs. An individual who buys a life insurance contract early in life is often uncertain about the future financial needs of his or her family, in the event of an untimely death. Ideally, the individual would like to insure the risk of having high future bequest needs, but since bequest motives are typically unverifiable, a contract directly insuring these needs is not feasible. We derive a long-term life insurance contract that is incentive compatible and achieves a higher welfare level than the naïve strategy of delaying the purchase of insurance until after one's bequest needs are known. We also examine the welfare effects of our contract and we show how third-party financial products, although beneficial to the individual in the short run, can be detrimental to one's ex ante utility. IntroductionPeople purchase life insurance to protect their dependents against financial losses caused by their deaths. Bernheim (1991) shows that there is a demand by breadwinners to hold part of their assets in a solely bequeathable form, as opposed to a form that could also be used for current consumption if one is alive. A similar result falls out of intertemporal equilibrium models, such as Farhi and Werning (2007), who show how it is desirable in an overlapping-generations context for parents to insure their children against the financial risks of their family.

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“…sured-related characteristics in contrast to our research that uses country-related macroeconomic variables.The Canadian Institute of Actuaries[10] conducted a study on the lapse experience for 10-year term insurance. The research captured data on age, gender, amount, policy duration, smoking status, mortality rating, preferred underwriting classification, joint/single life, policy structure (standalone or rider), payment frequency, mode of payment (pre-authorized or other) and province.These are policy-related or insured-related characteristics in contrast to our research that uses country-related macroeconomic variables.Fier and Liebenberg[11] test a microeconomic model of voluntary life insurance lapse behavior, linking the lapses with household related factors. They find T. Poufinas, G. Michaelide evidence that lapses are related to large income shocks and to the purchase of a different life insurance policy.…”

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confidence: 99%

Determinants of Life Insurance Policy Surrenders

Poufinas¹,

Michaelide²

2018

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Life insurance policies assist individuals maintain the value of their money and build savings to be used in the future. However in times of crisis their attitude may change. On one hand, they have an interest in keeping their policies, as they can be used to cover their future, medium-term or long-term needs in case of retirement or death. On the other hand, they may need the premium money or the accumulated savings to meet short-term needs so they lapse or surrender them-when a surrender value exists. A natural question is what are the drivers of the behavior of the insured? When do they decide to stop them and when do they choose to maintain them? We use linear regression to identify how certain main macroeconomic variables (Gross Domestic Product (GDP) per capita growth, unemployment, inflation, short-term and long term interest rates, and consumer confidence index) can explain the behavior of the insured towards keeping or interrupting their life insurance policy. We do that for pension savings (pure and plain vanilla endowment-including pensions), term life, whole life and unit linked individual policies.

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Life Insurance Lapse Behavior

Cited by 43 publications

References 25 publications

Life Insurance Demand Under Health Shock Risk

Life Insurance Demand Under Health Shock Risk

Uncertain Bequest Needs and Long‐Term Insurance Contracts

Determinants of Life Insurance Policy Surrenders

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