What determines the lapse rate in a life insurance policy?

What determines the lapse rate in a life insurance policy?

• A. Lapse rate depends solely on the insurer's financial performance.
• B. Lapse rate depends on policyholder persistency.
• C. Lapse rate depends on policyholder persistency, premium payment frequency, and lapse incentives; increases with higher lapse risks when premiums are unaffordable.
• D. Lapse rate is determined by investment returns on the policy's cash value.

Answer: (C)

Lapse rate reflects policyholder behavior in keeping a policy in force, specifically the risk that premiums aren’t paid and the policy lapses. The best answer recognizes that persistency (how likely a policyholder is to continue the policy) is central, but it’s also shaped by how premiums are paid and by any incentives or features that encourage continued coverage. If premiums become unaffordable and there are few or no mitigating incentives, the lapse risk rises. Investment returns on the policy’s cash value don’t set the lapse rate, though they can influence overall appeal; they don’t directly determine whether a policy lapses.

Lapse rate reflects policyholder behavior in keeping a policy in force, specifically the risk that premiums aren’t paid and the policy lapses. The best answer recognizes that persistency (how likely a policyholder is to continue the policy) is central, but it’s also shaped by how premiums are paid and by any incentives or features that encourage continued coverage. If premiums become unaffordable and there are few or no mitigating incentives, the lapse risk rises. Investment returns on the policy’s cash value don’t set the lapse rate, though they can influence overall appeal; they don’t directly determine whether a policy lapses.