A lapse is the cancellation of coverage
due to the non-payment of
premiums. Lapse rates can be an
important component of the pricing of long term care insurance
plans.
Consumer advocates and regulators fear
that some insurance companies will sell policies to people who
are probably not good candidates for purchasing the insurance
and thus count on them to lapse their coverage.
By doing so, an insurance company has
received premiums for a period of time but no longer faces the
risk of paying out
benefits.
Use of a high lapse rate assumption in
setting premiums can result in a lower-priced product and the
use of a low lapse rate assumption in setting premiums can
result in a higher-priced product.
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