Sudhakar Gupta has taken a life insurance policy on his life on 7-2-2018 for ₹1 lakh. But to get the benefit of lesser age premium the date of commencement of the policy is given as 7-4-2017. His yearly premium is ₹10,30

Lapsation of life insurance policies is a curse for the insurer and a serious disease within an insurance company - which, if not cured, could even lead to the whole company's bankruptcy. Lapsation impacts on customer retention, product performance, pricing factors, public image and workforce planning, and is ultimately detrimental to the insurer's business. Customer retention Lapses may be the source of customer dissatisfaction. Satisfied customers generally want to continue to do business with the company. Product performance Product performance and the solvency of any organization within a competitive market are entirely dependent on the persistence of the business. Pricing factors Insurance pricing depends on estimations as to the net rate of investment yield, management expenses and mortality selection. The impact of lapsation on these factors is mentioned below: Investment yield: The insurer may lose planned investment cash flows; this may result in forced investment sales (at a loss) in order to meet surrender demands. Management expenses: Insurance companies tend to make a profit out of premium received after three years of policy have completed. This is due to the fact that the first year of a policy is very expensive for the insurance company, compared with the premium taken in the first year. Mortality or morbidity adverse selection: In general, insured's that have adverse health or other insurability problems tend not to lapse, causing the insurer to experience a greater proportion of claims than expected if the lapse rate is high. Detrimental effect on public image The insurance company suffers the loss of public image through adverse publicity. This is namely because a lapsed policyholder will seldom speak well of the insurance company with which they were insured. The policyholder's ego is hurt. Workforce planning Policy lapsation even hampers insurance companies' ability to proper workforce planning, as they cannot accurately evaluate the number of administrative staff needed to process proposals and undertake any further processing or policy servicing. Lapsation is, therefore, an anti-employee phenomenon. Detrimental to the insurer's business Apart from the direct losses, the unproductive efforts involved in the administration of lapsed policies will mean the company may need to forego opportunities to generate genuine business. The organisational goals and objectives stand defeated, leading (in extreme cases) to the insurance company failing.