Don't Lapse into Temptation: A Behavioral Explanation for Policy Surrender

36 Pages Posted: 26 Jan 2015 Last revised: 10 Mar 2017

See all articles by Sven Nolte

Sven Nolte

Radboud University

Judith C. Schneider

Leibniz Universität Hannover - Faculty of Economics and Management

Date Written: January 25, 2015

Abstract

Many policyholders surrender their life insurance policies early, leading to substantial monetary losses for private households. Surrender can be explained rationally if it constitutes the last resort providing liquidity in the event of an urgent need of cash. In contrast, we find clear evidence in German panel data that for more than half of all surrendered contracts investors had cheaper options available to provide the required liquidity. This finding demonstrates that policyholders exhibit bounded rationality even in important life time decisions. We provide a behavioral explanation, focusing on the role of financial literacy, individual decision heuristics, and financial advice. In particular, we show that financial literacy and financial advice can mitigate the behavioral temptation to lapse.

Keywords: Life Insurance; Behavioral Insurance; Emergency Fund Hypothesis; Financial Literacy; Financial Advice; Heuristic Decision Making

Suggested Citation

Nolte, Sven and Schneider, Judith C., Don't Lapse into Temptation: A Behavioral Explanation for Policy Surrender (January 25, 2015). Available at SSRN: https://ssrn.com/abstract=2555268 or http://dx.doi.org/10.2139/ssrn.2555268

Sven Nolte

Radboud University ( email )

Nijmegen
Netherlands

Judith C. Schneider (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Königsworther Platz 1
Hannover, 30167
Germany

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