Researchers Eye Who Drops Life Policies When Slumps Hit

What You Need to Know

A team led by Ralph S.J. Koijen wanted to see how economic shocks affect U.S. life insurance policy lapse rates.
Lapse rates tend to spike when employment and GDP fall.
Underlying lapse rates at 30 large life insurers analyzed ranged from about 2.5% to about 10%.

USAA — a policyholder-owned insurer that has historically focused on serving military veterans and their relatives — may be the big U.S. life insurer with the lowest policy lapse rate.

A team of researchers led by Ralph S.J. Koijen has presented data supporting that conclusion in a new analysis of how economic slumps affect which insureds drop their life insurance.

To conduct that analysis, the Koijen team crunched data from the public financial reports of the 30 biggest U.S. life insurer groups, for a period from 1996 through 2020.

USAA led in terms of life policyholder loyalty, with a lapse rate of just 2.57%.

Legal & General U.S., MassMutual, Northwestern Mutual and Principal Financial Group were other insurers with lapse rates under 5%.

Primerica, which tends to sell life insurance to relatively low-income consumers, ranked 30th on the list, with an underlying lapse rate of 9.97%.

The researchers concluded, after analyzing more data, that consumers under age 35 were much more likely to drop coverage in response to an economic crisis than older insureds, and that consumers who smoked were much more likely to drop coverage than nonsmokers.

What It Means

The researchers contend that the lapse patterns suggest that life insurance pricing could sometimes be unfair to younger policyholders, because pricing may fail to take their higher lapse risk into account.

If the researchers are right, for advisors, the takeaway may be that helping younger clients keep coverage in place is important to helping them build the wealth needed to support retirement planning efforts and meet other planning goals.

The Team

Koijen is a finance professor at the University of Chicago business school.

He worked on the new paper with Hae Kang Lee of the University of South Carolina business school and Stijn Van Nieuwerburgh, a Columbia University graduate student.

The researchers have published their analysis as a working paper on the website of the National Bureau of Economic Research.

A working paper is a research paper that has not yet gone through a full peer review.

The Study

The researchers based their research mainly on background data from the S&P Global Market Intelligence insurance company financial filing database and on policy-level data from one large, unnamed life insurer.

Overall, a severe crisis, such as the 2007-2009 Great Recession, might increase a company’s life policy lapse rate by about 1 percentage point or more, after holding other factors considered equal, the researchers concluded.

The researchers found that, after holding factors such as risk class, smoking use and type of coverage equal, being under age 35 increased the risk of letting a life policy lapse by 46%, and being ages 25 through 34 during an economic slump increase lapse risk by an additional 15%.

Being a smoker added about 44% to lapse risk, according to the researchers’ analysis.