Curbing insurance policy lapses: whose responsibility?

I have on countless occasions been confronted with life insurance policyholders who have very little or no understanding of the technical jargon ‘lapse.’ In our part of the world, the issue of irregular premium deductions is a common phenomenon.

What is a policy lapse?

In life insurance, lapse simply refers to an inactive policy, resulting from non-receipt of premiums for a defined period. These premium gaps therefore resign the obligation on the insurer to pay out a death claim on the policy, particularly on a funeral policy.

For an investment policy, however, the fund value at the time of claim is paid out. Usually, a 30-day moratorium is allowed, after which the policy would be considered lapsed. An insurer may, however, extend this period for greater flexibility.

Most insurers would typically, immediately notify affected clients of their premium defaults and allow them the opportunity to reinstate their lapsed policies without further underwriting. However, if a claim arises during the period of the moratorium, the insurer is under obligation to pay the claim. 

Causes of lapses

The myriad of causes of policy lapses are generally human and technical in nature. The most common cause is the failure of clients’ pay/deduction sources to consistently effect deduction. For example, if Bank A failed to deduct Mr B’s premium for August 2015, due to technical difficulties, Mr B will, typically, have up to end of September 2015 to pay up the lost premium, otherwise Mr B’s policy may lapse. Moreover, the inefficiency of some banks’ schedule officers in processing standing/debit orders also cause premium lapses.

Besides, premium deduction inconsistencies arising from a client’s poor management of his/her accounts, may also lead to policy lapse. 

Similarly, a client’s inability to sustain cash premium payment is a recipe for policy lapse. Though payroll sources, traditionally, have a higher collection rate, it is sometimes cumbersome to have employers’ consistent approval.

For instance, it is common to have the Controller and Accountant General’s Department (CAGD) undertake intermittent software restructuring that tends to often affect employees’ deduction on the payroll, albeit temporarily.

This, therefore, creates conditions for policy lapse. In some situations, the clients may have been deducted the premium, but the source delayed in submitting the deducted premiums to the insurer.

This does not only deprive the insurer of premiums for investment and commissions payable to its agents, but also creates conditions for policy lapse. 

Reinstating lapsed policies 

Depending on the type of policy, a policyholder may be allowed to reinstate a lapsed policy within six months, without further underwriting, but subject to his/her paying out all outstanding premiums. 

The limited underwriting usually requires that the insured person answers some health questions, and attests that no material changes in health have occurred since the policy was first underwritten.  

Reinstatement period and cost

The reinstatement period is very important to policyholders for a couple of reasons.  Firstly, the insured person may not need to go through the underwriting process to clarify variations in the insured’s health status during the lapse period, as long as he/she upholds utmost good faith in requesting reinstatement.

Moreover, the underwriting process may uncover more about a person’s health than they ever knew, for better and worse; however the latter is usually the case.  Avoiding underwriting when possible, almost always, leads to lower insurance premiums.

Secondly, even with the same health rating, a new life insurance policy will always be more expensive, since the insured would have increased in age. The bottom line is: Reinstating a life insurance policy rather than taking out a new policy will always save money.

After a policy has lapsed, a slightly larger payment must be made to reinstate the policy; hence it is imperative for a policyholder not to allow his / her policy lapse in the first place. 

Avoiding lapses

The safest way to avoid a lapse is to always make premium payments regularly. Usually, through SMS and other communications modes, insurers often put out lapse notices to their clients prior to the lapse taking place, and immediately afterwards. In this regard, policyholders are made aware of critical issues about their policies in order to avoid lapses.

The way forward

Over the period, banks and payroll sources have greatly supported insurers and clients in premiums deductions, but a lot more needs to be done in order to enhance both the insurance awareness and penetration in Ghana.

Admittedly, challenges such as insufficient funds are beyond what the schedule officers in these institutions can manage. This, however, does not take away the duty of ‘care’ they owe both clients and insurers, through due diligence and adherence to deadlines.

If the deduction sources support insurers in the ways they need to, it is my firm conviction that all stakeholders would be happy with business continuity and sustainability.

It is worth noting that premium deductions or collections are a shared responsibility; hence the issue of irregular premium deductions must be of concern to all stakeholders, as failure to ensure consistent premium transmission could lead to dire consequences for clients, especially during claims stage.

Overall, consistent premium transmission will ensure greater transparency and trust among all stakeholders, particularly between insurers and the insuring public.

Until next week, “This is insurance from the eyes of my mind.”