Lapse-Based Insurance

Most individual life insurance policies lapse, with lapsers cross-subsidizing non-lapsers. We show that and lapse patterns predicted by standard rational expectations models are the opposite of those observed empirically. propose two behavioral consistent evidence: (i) consumers forget to pay premiums (ii) understate future liquidity needs. conduct surveys a large insurer. New buyers believe their own probabilities small compared insurer’s actual experience. For recent lapsers, forgetfulness accounts for 37.8 percent lapses while unexpected 15.4 percent. (JEL D91, G22, G52)