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.