Life Insurance Lapse Risk in a Covid-19 World

Attention life insurance policy holders: as insurance companies are forced to raise premium prices to maintain profitability in the wake of economic complications brought on by the COVID-19 crisis, there is an increased risk of a life insurance policy “lapsing”. When an account lapses, the life insurance policy will no longer pay a death benefit or provide any insurance coverage for the insured person. If you are having difficulties with your policy or need assistance reinstating, we can help. Below is a helpful review of the different options available, and how current events are impacting them.

Types of Life Insurance Companies

Life insurance companies come in two flavors :

  1. stock companies and
  2. mutual companies. 

A stock life insurance company is a publicly traded company owned by its stockholders.  The objective of a stock insurance company is to make a profit for its shareholders; who may or may not be policyholders of the company.

Conversely, mutual insurance companies are owned by their policyholders.  The sole purpose of a mutual life insurance company is to provide insurance coverage for its members.  Profits from the mutual insurance company are distributed to its member policyholders in the form of dividends.

Types of Life Insurance

Stock Market’s Impact on Life Insurance Policies

As previously stated, stock life insurance companies are publicly traded and the value of its stock is determined by the stock market.  With the bear market caused by the Covid-19 pandemic, the market capitalization of the stock life insurance companies has decreased as much as 40% recently.  Under state insurance regulations life insurance companies are permitted to increase their non-guaranteed cost of insurance, which helps the insurance company maintain profitability.  These increases negatively impact the life insurance policy performance, which can lead to increased premiums or the risk of lapse on non-guaranteed policies.  Mutual insurance companies do not have the same profitability pressure as any excess profits are paid directly to the policy holders in the form of dividends.

Recommended Action

If you have any life insurance policies it is prudent to perform an annual review of the policy performance and also to make sure that the coverage meets your current needs and that the insurance will be there for your beneficiaries when you pass away.

Our insurance specialists at KLR Insurance Advisors are available to meet with you and review your current coverage at no cost to you.

Published on: 04.28.20

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