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

Research output: Journal contributionsJournal articlesResearchpeer-review


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.

Original languageEnglish
JournalJournal of Banking and Finance
Pages (from-to)12-27
Number of pages16
Publication statusPublished - 01.06.2017
Externally publishedYes

    Research areas

  • Behavioral insurance, Emergency fund hypothesis, Financial advice, Financial literacy, Heuristic decision making, Life insurance
  • Management studies