Don't lapse into temptation: a behavioral explanation for policy surrender

Publikation: Beiträge in ZeitschriftenZeitschriftenaufsätzeForschungbegutachtet

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Don't lapse into temptation: a behavioral explanation for policy surrender. / Nolte, Sven; Schneider, Judith C.
in: Journal of Banking and Finance, Jahrgang 79, 01.06.2017, S. 12-27.

Publikation: Beiträge in ZeitschriftenZeitschriftenaufsätzeForschungbegutachtet

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@article{d61d56d01ea54a65ba35c71ee1a1e8a4,
title = "Don't lapse into temptation: a behavioral explanation for policy surrender",
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. Yet 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 there must be other factors influencing this important life decision. We provide a behavioral explanation, focusing on the role of individual decision heuristics, financial literacy, and financial advice. In particular, we show that financial literacy and financial advice can mitigate the behavioral temptation to lapse, while the tendency to rely on heuristics increases lapse probability.",
keywords = "Behavioral insurance, Emergency fund hypothesis, Financial advice, Financial literacy, Heuristic decision making, Life insurance, Management studies",
author = "Sven Nolte and Schneider, {Judith C.}",
year = "2017",
month = jun,
day = "1",
doi = "10.1016/j.jbankfin.2017.02.011",
language = "English",
volume = "79",
pages = "12--27",
journal = "Journal of Banking and Finance",
issn = "0378-4266",
publisher = "Elsevier B.V.",

}

RIS

TY - JOUR

T1 - Don't lapse into temptation

T2 - a behavioral explanation for policy surrender

AU - Nolte, Sven

AU - Schneider, Judith C.

PY - 2017/6/1

Y1 - 2017/6/1

N2 - 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. Yet 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 there must be other factors influencing this important life decision. We provide a behavioral explanation, focusing on the role of individual decision heuristics, financial literacy, and financial advice. In particular, we show that financial literacy and financial advice can mitigate the behavioral temptation to lapse, while the tendency to rely on heuristics increases lapse probability.

AB - 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. Yet 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 there must be other factors influencing this important life decision. We provide a behavioral explanation, focusing on the role of individual decision heuristics, financial literacy, and financial advice. In particular, we show that financial literacy and financial advice can mitigate the behavioral temptation to lapse, while the tendency to rely on heuristics increases lapse probability.

KW - Behavioral insurance

KW - Emergency fund hypothesis

KW - Financial advice

KW - Financial literacy

KW - Heuristic decision making

KW - Life insurance

KW - Management studies

UR - http://www.scopus.com/inward/record.url?scp=85015608799&partnerID=8YFLogxK

U2 - 10.1016/j.jbankfin.2017.02.011

DO - 10.1016/j.jbankfin.2017.02.011

M3 - Journal articles

AN - SCOPUS:85015608799

VL - 79

SP - 12

EP - 27

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

ER -

DOI