A Lapsing Decision...

Lapse: Definition in the insurance industry:
“Termination of coverage resulting from failure of a policyholder to pay premiums.”

Maybe this is a small and often overlooked decision that both companies and individuals make on a daily basis, but it really adds up. Please consider this…

According to Insurance industry statistics, the average amount of life insurance sold in this country annually by premium is approximately $165 Billion. Further stats show that the average first year lapse rate [high/low companies] is approximately 6%.

Calculating these figures, the loss to this group of previously insured policyholders is:

$10,000,000,000.00 per year

They have nothing to show for their $10 Billion dollars…nothing. The money has gone to the insurer and, to add insult, the insurance company is off the hook.

Now, look around other industries and you will find similar results. For example, the automobile industry shows a shadow result of approximately 6% of new cars back to the contract holder (dealer, bank or finance company…etc) within the first year. Result:

$22,000,000,000.00 per year

So, if we think through all the industries that have similar products, services and statistics over our economic lifetimes…zillion$ in losses. That affects profitability, ratings, reputations, competitiveness, and on and on. Where is this headed?

One shift we see is that, as a percentage, more and more products and services are being purchased through direct marketing (internet, direct mail, specialty providers, etc.) which will cut out many salespeople and their front loaded commissions.

The life insurance industry still contends that their product is “sold and not bought.” Only a small number of policies were bought through direct marketing just a few years ago. Now…one in five…headed toward one in four. Point is that as more people buy on purpose rather than get sold by accident, these lapse rates may improve. That would be good for everyone.

Who knows where these costly lapse rates will fall as more and more people make more independent buying decisions. But, one thing is clear.

The buyer has never been better armed to conduct due diligence about most any product, service or company than they are today. We can instantly get a report from a smart phone, desktop or laptop on about anybody (salesman) or anything (car-policy-lapse rate, etc). Almost everyone has that access now or soon will.

With all that information in our hands, we should be better prepared to make costly decisions than ever before. But conversely, if a lawyer, judge or jury asked us in a legal dispute what level of due diligence and suitability we conducted/initiated in the process of buying a product or service…today, there will be little escape or retort. As more independent buying is accelerated, more emphasis will be transferred to us to do our decision homework and due diligence in the process.

Decision making will only get more significant tomorrow.

We can all use good reliable resources.