The longer a policy stays in-force, the more benefits both the policy owner and insurance company will see. Persistency is a way of measuring how long a life insurance company’s policies are staying in-force/active, which is used to measure their success.
Unfortunately, many policy owners fail to keep their policies in-force long enough to realize the intended benefits. In other words, the policy has been terminated/lapsed.
It can take 10 to 20 years for a policy to break even. This makes it vital for insurance companies to keep policies in-force as long as possible.
When a policy terminates prematurely, this can result in a loss to the company. This is especially true on permanent policies that have only been in-force for a short time.
Regulators and rating agencies closely monitor company persistency. If a company has a high level of early lapses (i.e., the same as a low persistency rate), then there is a problem somewhere.
Poor persistency is perpetual problem for the life insurance industry.
Policyholders who lapse in the early years leave the company with unrecoverable expenses, but can be reduced through “lapse support”.
A lapse support product involves shifting expenses between policy owners. However, in this case, the burden to those who lapse.
This generates very large gains for the insurance company in the first 10 to 15 years (i.e., the policy’s cash value remains artificially low) and very large losses thereafter (by increasing the policy’s cash value by more than its interest earnings).
Under this pattern, policyholders who lapse early will generate huge profits for the company. These profits are used to then offset the losses that will occur when persisting policyholders reach the years when the policy “super performs.”
The net result is that lapsing policyholders subsidize persisting policyholders, making long-term performance look better for those who never lapse.
Some insurers use a pricing technique wherein the products are designed to recover the initial loss very quickly. This way the products are generally lapse insensitive. In this situation, it does not matter when the policyowners lapse the policy.
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By Tony Steuer, CLU, LA, CPFFE
Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.