Don't lapse into temptation: a behavioral explanation for policy surrender
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In: Journal of Banking and Finance, Vol. 79, 01.06.2017, p. 12-27.
Research output: Journal contributions › Journal articles › Research › peer-review
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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 -