Causes of Policy Lapsation

Several factors contribute to the high rates of policy lapsation. These can range from customer misperception to external financial factors, and understanding them is key to mitigating the issue effectively.

1. Mis-selling and Lack of Understanding

   Many policies are sold without adequately educating customers about the product's features, benefits, and limitations. Mis-selling can lead to confusion and dissatisfaction when customers realize the product may not meet their expectations. Over time, this lack of understanding results in policyholders discontinuing their coverage, as they do not see value in continuing premium payments.

2. Financial Constraints

   Policyholders may experience unforeseen financial hardships, such as job loss, medical emergencies, or significant personal expenses. These financial constraints can make it challenging to keep up with premium payments, leading to the policy lapsing. It’s important for insurers to recognize and address such vulnerabilities to retain customers.

3. Perceived Low Returns

   In life insurance policies, particularly traditional ones, a portion of the premium goes toward providing the insurance benefit rather than generating returns. Agents must clearly explain this aspect to policyholders. Often, customers perceive the returns as too low when compared to other investment avenues, leading them to discontinue the policy in search of better returns. This is a common misunderstanding, as life insurance is primarily designed for risk protection, not investment, which must be explicitly communicated.

4. Agent Behavior

   In some cases, agents may prioritize achieving sales targets over properly aligning products with customer needs. This can lead to a mismatch between what the policyholder requires and what they purchase. As a result, once customers realize this mismatch, they may lose trust in the product and lapse the policy. Proper training and ethical selling practices are vital in addressing this issue.

5. Customer Behavior

   Policyholders may lose interest or become disengaged over time due to a lack of proactive customer engagement from the insurer. This passive behavior can cause them to discontinue the policy when it feels irrelevant or when they don't perceive any immediate benefit.

6. Human Unpredictability

   Human behavior is inherently unpredictable, and policyholders’ changing personal circumstances, priorities, or financial preferences can lead them to discontinue insurance coverage. Life changes, such as relocation or a shift in financial planning, can significantly impact their willingness to continue premium payments.

7. Allocation of the Same Funds to Different Areas or Investments

   Policyholders may prefer to allocate funds originally designated for life insurance premiums to other financial goals, such as investment opportunities, debt repayment, or short-term savings. This reallocation of resources can lead to lapsation, particularly if customers do not fully understand the long-term benefits of maintaining life insurance coverage.

Suggestions for Improvement:

• Clarify Policyholder’s Role in Lapsation: As suggested in the review, make it explicit that policyholders themselves discontinue the policy at their discretion, leading to lapsation. This clarification will emphasize the personal responsibility in lapsation, improving customer education.
• Elaboration on Points 5, 6, and 7: Further elaboration has been added above, highlighting customer behavior, unpredictability, and fund reallocation. These points can now provide a deeper understanding of the broader causes of lapsation.
• Agent’s Role in Explaining Policy Returns: As recommended, point 3 now includes a clear statement that agents should explain to customers that low returns are due to the insurance nature of the product, emphasizing that it is not an investment but primarily a risk protection tool.

This elaboration should provide a clearer understanding of policy lapsation causes, aligning with the review suggestions to improve the overall quality and depth of the document.