- Length a policy needs to stay active for benefits
- July 22, 2013
Persistency is a way of measuring of how long a life insurance company’s policies are staying in-force/active, which is used to measure their success.
In other words, the longer a policy stays in-force, the more benefits both the policy owner and insurance company will see.
Unfortunately, many policy owners fail to keep their policies in-force long enough to realize the intended benefits, meaning the policy has been terminated/lapsed.
It can take 10 to 20 years for a policy to break even, which 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, especially 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 policy holders 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 policy owners lapse the policy.
If you seek further assistance or additional information, please feel free to email me at email@example.com.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.