New Lapsation Study Delves Into UL Policyholder Habits

BALTIMORE -- LIMRA researchers have tracked life insurance lapse rates since the 1960s, adding the Society of Actuaries as a partner in the 1990s.

The information is crucial for insurance companies and their reserving capability. Insurers risk substantial amounts of money if lapse rates get too high, so there are obvious benefits to understanding policyholder trends.

In particular, better understanding how clients manage universal life. UL policies have unique funding options and older policies benefited from much higher interest rates. Many of those older UL policies are underfunded and leaving policyholders facing a dilemma.

LIMRA responded to the need for better UL information and added it to its lapsation study this year. Marianne Purushotham, LIMRA vice president, will lead a session on the latest study results during today's Life Insurance Conference.

"Universal life has a unique aspect in that it was designed to give people flexibility," she said. "So you don’t have to pay premium every month, and you don’t have to pay even every year. So universal life in general was to be more paid upfront than other insurance.

"So you look at persistency year after year, how much did they pay this year as opposed to last year, or how much did they pay this year as opposed to what they expected when they bought the policy."

LIMRA study results show "a really big blip" in the first few years of a typical UL policy, Purushotham explained. Not surprisingly, very big premium payments in the first few years and then a declining amount thereafter.

With interest rates much lower than they were in the 1980s and 1990s, or even in 2007-08, how policyholders are paying for UL has a major impact on whether those policies will remain in-force.

"We’re trying to understand how people are funding their policies because UL isn’t like whole life or term," Purushotham said. "As long as you have money in your account, your policy isn’t going to lapse. We’re trying to look at are people funding them properly.

"That’s kind of what the new study is looking at. You can see how the two are interconnected because the way you pay your premium directly affects whether your policy will lapse."

While lapsation rates are of particular interest to insurers, they have big impacts on agents as well. After all, agents are the spokespeople for the products and the ones policyholders interact with most. So there is a trickle-down effect, Purushotham said.

"It helps (insurers) to understand if they need to make changes to how they manage their in-force business," she said. "So do they need to do more education, or do they need to change the way they administer things? Are there things that they should be doing in conjunction with their agent to guide what customers do with those policies?"

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.

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