University of Connecticut

OpenCommons@UConn

Honors Scholar Theses Honors Scholar Program

Spring 5-1-2020

Evaluating the Cost of a Lapse in Life Insurance and its

Implications on Developing a Policyholder Retention Strategy for a
Company
Peiyi Zhang
University of Connecticut - Storrs, peiyi.zhang.py@gmail.com

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Recommended Citation
Zhang, Peiyi, "Evaluating the Cost of a Lapse in Life Insurance and its Implications on Developing a
Policyholder Retention Strategy for a Company" (2020). Honors Scholar Theses. 726.
https://opencommons.uconn.edu/srhonors_theses/726
Evaluating the Cost of a Lapse in Life Insurance

and its Implications on Developing a Policyholder

Retention Strategy for a Company

Peiyi Zhang, B.A. Mathematics/Actuarial Science

Thesis Supervisor: Dr. Jeyaraj Vadiveloo

Honors Advisor: Professor James E. Trimble

University of Connecticut

Spring 2020
 Zhang 2

Table of Contents

Abstract…………………………………………………………………………... 3

1. Introduction…………………………………………………………………... 4

1.1. Life Insurance……………………………………………………………. 4

1.2. Lapses……………………………………………………………………... 5

1.3. Terminologies…………………………………………………………….. 6

2. Conservation Strategies…………………………………………………….... 8

2.1. History of Conservation Activities in Insurance……………………….. 8

2.2. Conservation Strategies in Life Insurance…………………………….... 8

3. Modeling……………………………………………………………….…….. 10

4. Analysis……………………………………………………………….……… 13

5. Proposed Policyholder Retention Strategies………………………………. 17

5.1. Actuarial Perspective…………………………………………………… 17

5.2. Business Perspective…………………………………………………….. 18

6. Conclusion…………………………………………………………………..... 20

Works Cited……………………………………………………………………... 21

Appendix ……………………………………………………………………....... 22
 Zhang 3

Abstract

In the insurance industry, many companies focus on policyholder retention as one of their

key tools to retain premiums collected from customers. Customers may lapse after their purchases.

Insurance companies will not receive premiums and have to pay out surrender benefits which

makes it costly for an insurer. Indeed, understanding the cost of a lapse is important to retain

policyholders. This paper focuses on the cost of a lapse in life insurance, and its implications on

developing policyholder retention strategies. The first part of the paper summarizes the general

background of life insurance, lapses, and conservation strategies. The second part introduces the

modeling and simulations of three types of life insurance policies. The economic gain of a life

insurance policy is defined as the accumulated value (AV) of past premiums plus the present value

(PV) of future premiums until death/lapse less the PV of future benefits and less the AV of

acquisition costs at issue. Next, the paper proceeds to analyze the cost of a lapse of a policy and

quantify it as the difference between the economic gain of a policy at 0% lapse rate and that at

10% lapse rate. Based on the cost of a lapse, which is the same as the gain from conservation

strategies, the insurance company will be able to rank its policies and prioritize which policies to

focus on. Recommendations on developing conservation strategies to retain policyholders are

discussed in the following section from both an actuarial perspective and a business perspective.
 Zhang 4

1. Introduction

1.1 Life Insurance

Individuals, companies, and organizations face different risks every day. Most of the time,

risks arise due to the uncertainties of multiple outcomes that may happen. For example, when a

person falls sick, he may recover, be critically ill, or even die. As one of the main purposes of

insurance is to provide protection to its beneficiaries or policyholders, there is an important

relationship between risk and insurance. According to the 2019 Insurance Fact Book, 52% of the

Net Premiums written in the U.S insurance industry in 2017 comes from Life and Health Insurance

policies (The III 5), which indicates the importance of life insurance to people's lives. Moreover,

the total life insurance premiums amounted to USD 2.6 trillion, which is 3.5% of the global GDP

in 2016 (KPMG 6). From the insurer’s perspective, it is also valuable to investigate how life

insurance can bring in more benefits to the company. Therefore, the main focus of this paper is

going to be life insurance.

Insurance is an agreement between two parties - one is the insurer or the insurance

company, and the other is the policyholder or his designated beneficiary. The policyholder pays a

stipulated payment called premium to the insurance company, in exchange for a defined amount

of money upon the occurrence of any specific loss (Anderson & Brown 3). Specifically in life

insurance, the defined amount of money is usually a surrender charge when someone lapses, or a

death benefit to the beneficiary of a policyholder when death occurs.

Two of the most common types of life insurance policies are used for the modeling in the

paper. One of them is term life insurance, with ranges of term length between 1 year and 30 years.

The premiums of term insurance are usually the lowest amongst all types of life insurance, but it

will increase with the age of the policyholder if the term policy is renewed (Smith & Hayhoe 1).
 Zhang 5
During the term length, the policyholder may voluntarily choose to lapse by stopping the payment

of premiums, and the insurer has to pay out a surrender charge. At the end of the term, if the

policyholder survives and the policy matures, he has the option to end the policy or to extend/renew

it. If the policyholder dies, the insurer will pay out death benefits to the beneficiaries of the

policyholder.

Whole life insurance is the other one used for the modeling. It works similarly to the Term

Life, but whole life policies will pay out the death benefit regardless of when the policyholder dies

as the term length of whole life policies is lifelong. The premiums of whole life insurance are much

higher than term life insurance as it is a lifetime protection.

1.2 Lapses

With the tumultuous changes in the economy and technology, some people may disagree

in regards to investing in life insurance, because of its expensive premiums and the existence of

other financial priorities with faster rewards. Policyholders may also assume that they are healthy

and life insurance is not necessary, after continuously paying premiums for a few years. Lapses

happen when policyholders choose to discontinue their policies with insurance companies,

impacting the economic gains of insurers.

When a lapse occurs, the policyholder drops out of the insurance policy and stops paying

regular premiums. The insurance company needs to pay out a surrender charge, which is close to

the reserve at this point. A higher lapse rate means fewer people renew policies, which may

adversely affect the profitability of the insurance company. People who usually think that they are

healthy choose to lapse their policies, leaving the group of policyholders who are not confident in

their health situation with insurance companies. The mortality rate of the remaining group could
 Zhang 6
go up compared to the original group, and there is a higher probability that insurers will pay out

death benefits. Nevertheless, if the policyholder is holding a term life insurance policy and he is at

the later part of the term length, then it might be better for this policyholder to lapse. There is a

higher chance that policyholders may accidentally pass away. Paying out death benefits at such a

late stage is detrimental to the insurer, and lapses would be preferred in this particular case. Hence,

retaining policyholders and managing the lapse rate has to be strategically managed, and is one of

the most crucial goals for insurance companies to earn profits in the long run.

In theory, there is no clear definition or formula about what the cost of a lapse is. It is also

hard to quantify the cost of a lapse, because it depends on when the lapse happens during the term

length, the type of insurance policy and how this policy is priced. In this paper, the cost of a lapse

is viewed the same as gain from conservation strategies to retain policyholders, and it is defined

as the difference between the economic gain at 0% lapse rate and the economic gain at the policy’s

underlying lapse rate assumed to be 10% in the modeling of this paper.

1.3 Terminologies

1) Duration

The duration of a life insurance policy is the maximum number of years over which the

policy coverage will continue, provided that the policyholder is alive and the policy is

active.

2) Premiums

Premiums are the payments made by the policyholders to their insurance companies

regularly. In general, the three most common types of premiums are level premiums, yearly

renewable term premiums, and decreasing term premiums.

 Zhang 7
3) Acquisition Costs

The acquisition costs are the direct costs an insurer incurs when acquiring a new policy

with incoming premiums.

4) Economic Gain

The economic gain of a life insurance policy is defined as the accumulated value of past

premiums plus the present value of future premiums until death/lapse less the present value

of future benefits and less the accumulated value of acquisition costs at issue.

5) Cost of a Lapse

In this paper, the cost of a lapse is essentially the same as the gain from implementing

conservation strategies to retain policyholders, and it is defined as the difference between

the economic gain at 0% lapse rate and the economic gain at an assumed underlying 10%

lapse rate.

6) Conservation Strategies

In this paper, the conservation strategies for life insurance is the same as the policyholder

retention strategies that the insurance company develops to control its cost of lapses.
 Zhang 8

2. Conservation Strategies

2.1 History of Conservation Activities in Insurance

The cost is paid for at first by the insurance company, and the company makes a profit

because of the fact that the savings from conservation are larger than the cost. These savings

through rate adjustment are passed on to the insured, and at the same time, the expense is gradually

passed on to the insured. Eventually, there comes a time through the operation of the law of

diminishing returns when further conservational activity will not pay for itself and further activity

can therefore not be undertaken except for reasons other than economics (Whitney 237).

2.2 Conservation Strategies in Life Insurance

As a protection to human lives or physical properties, insurance usually reduces the

negative impacts of unfortunate events. However, insurance does not prevent misfortunes from

happening, and in many cases, the costs of these misfortunes can be detrimental to a company.

For a life insurance policy, the insurance company will conduct examinations and assess

risks associated with the policyholder to decide if it will accept this policyholder. After that, the

policyholder pays premiums regularly, and the only uncertainty left in this policy is how long he

can live. If the policyholder survives beyond the term length of the insurance, the insurance

company will make money due to the premiums collected and the interest earned on the premiums

over time. However, if the person did not make it to the end of the term, the insurance company

has to pay out benefits due to death or lapses. While it is hard to foresee how many people are

going to drop their policies in the future, there are conservation strategies that insurance companies

can implement to help them better estimate the lapse rate levels so as to achieve cost efficiency

and better profits.

 Zhang 9
In this paper, the focus of the modeling is to quantify the cost of a lapse and to demonstrate

the importance for insurance companies to manage the lapses in different situations. Conservation

strategies will be provided in a later section with both an actuarial perspective and a business

perspective, bringing a more comprehensive business acumen to the insurance company.

 Zhang 10

3. Modeling

The ultimate goal of this model is to evaluate the cost of lapses and how it can help

companies implement conservation strategies to retain their policyholders. There are three

situations that can occur to a policyholder:

1. The policyholder survives throughout the whole term, and the policy matures. All

premiums collected are the gains to the insurance company.

2. The policyholder decides to stop paying premiums to the insurance company and

lapses the term insurance policy.

3. The policyholder dies during the term period. The insurance company pays out the

Death Benefit (Face Amount) to the beneficiary of the policyholder.

In total, 20,000 scenarios are simulated by using Microsoft Excel. Each scenario is

represented by an index number from 1 to 20,000, and it will be assigned with one of the status

among “alive”, “lapse” or “death”. The status is assigned based on the testing lapse rate and

mortality rate from the VBT table. For example, with a 10% lapse rate and a mortality rate of

0.03% for the first year, there should be 2,000 scenarios that lapse, 6 scenarios that die, and the

rest 17,994 scenarios stay alive in the first year. If the index number is smaller or equal to 17,994,

the policy will be an “alive”. If the index number falls between 17,994 and 19,994 (inclusive), the

policy will be a “lapse”. Otherwise, a “death” will be assigned to the policy. If the policy is not

“lapse” or “death”, it will move on to the next year and use a 10% lapse rate and next year’s

mortality rate.

Assumptions

1. Use the select-and-ultimate mortality table - 2018 Valuation Basic Table (VBT).

2. Use 20,000 scenarios to stabilize policy status.

 Zhang 11
3. Interest rate is 3%.

4. Expense is assumed to be 0%.

5. The gross premium is 1.2 times the net premium.

6. The acquisition cost is 2 times the gross premium in the first year.

7. The surrender charge is assumed to be the reserve calculated at the time when lapse occurs.

8. The death benefit is $100,000.

Tested Life Insurance Products

There are three types of life insurance policies tested, and they are listed as following:

Calculation of the Economic Gain

All cash flows are evaluated at the beginning of the term length for each policy. The overall

economic gain is the average of economic gains of 20,000 scenarios. All premiums are treated as

cash inflows. The death benefit paid at death, surrender charge paid at lapse, and the acquisition

costs at the beginning are treated as cash outflows. The overall economic gain equals to:

PV (Future Premiums) + AV (Past Premiums)

- AV (One-Time Acquisition Costs at the beginning)

- PV (Surrender Charge, assumed as the reserve at that specific time when lapses)

- PV (Death Benefit when death happens)

 Zhang 12
Methodology

1. Set the lapse rate as 10%.

2. Compare the average present value of economic gain through all scenarios.

3. Set the lapse rate to 0% which means no lapse. Calculate the average present value of

economic gain through all scenarios.

4. Calculated the gain from conservation strategies as the difference between the economic

gains in (2) and (3).

Quantify the Cost of a Lapse

This paper analyzes the cost of a lapse, i.e. the gain from conservation, as:

Gain from conservation (cost of a lapse) = Economic gain at 0% lapse rate

– Economic gain at 10% lapse rate

Furthermore, how the cost of a lapse/gain from conservation strategies changes with

variations in policyholder duration, term length, and lapse rate will be analyzed. These analyses

will help to demonstrate the relationship between the cost of a lapse and those changing factors,

and contribute to how conservation strategies will be developed in the best interest of the company.
 Zhang 13

4. Analysis

Economic Gain by Duration

The economic gain of a policy increases as the duration increases for all three types of life

insurance policies tested. During earlier durations, the economic gain at 0% lapse rate is always

higher than the economic gain with 10% lapse rate. However, after a certain duration, the economic

gain with no lapse will become smaller than the economic gain at 10% lapse rate until the end of

duration. The trend of economic gains at 0% and 10% lapse rate by duration explains why there is

a positive gain from conservation at earlier durations, and decreases to negative values later on.

Table 1: Economic Gain at 0% and 10% Lapse Rates by Duration for a 15-Year Term Life Policy

For example, the economic gain at 0% lapse is larger than the economic gain at 10% lapse

rate from duration 0 to duration 4. After duration 5, the economic gain at 0% lapse rate becomes

less than that at 10% lapse rate, which leads to a negative gain from conservation strategies. This

is also observed in both the 25-year term life policy and the whole life policy.

Gain from Conservation Strategies by Duration

1) 15-Year & 25-Year Term Life Policy

The gain from conservation strategies of the policy at different durations reflects

how much costs a lapse is to an insurer. The graphs of 15-Year and 25-Year Term Life
 Zhang 14
Policy exhibit a similar trend. The gain from conservation strategies decreases gradually

from positive to negative values, and increases back to 0 at the end.

Table 2: Gain from Conservation Strategies by Duration for 15-Year & 25-Year Term Life Policies

This shows that the longer the duration, the less the gain is obtained from

conservation strategies and controlling the lapse rate. Moreover, there are only positive

gains from conservation strategies at the early durations. Evidently, it is more beneficial to

control lapse rates at earlier durations.

The gain from conservation strategies increases after reaching its minimum value.

Even though the economic gain at 10% lapse rate is larger when the gain from conservation

strategies becomes negative, the increasing rate of the economic gain at 0% lapse rate

accelerates towards the end. Eventually, the economic gains at 0% and 10% lapse rate

become the same. Hence, controlling the lapse rate at a later stage is not necessary, because

economic gains do not differ much whether lapses are present or not.

2) Whole Life Policy

In general, the whole life policy exhibits a similar trend as what is observed in the

15-Year and 25-Year Term Life Policy. The 33-year period of positive gain from

conservation strategies is much longer than term insurance policies. This means that
 Zhang 15
controlling the lapse rate during these 33 years will be more profitable to the company.

Between the duration 40 and duration 60, the gain from conservation strategies remains

almost steady. A sharp decrease is observed after the 60-year duration. Since the issue age

of the modeling policy is at age 45, and the mortality table becomes artificial after 60 years,

i.e. at age 105, it is possible that there is a sudden drastic change.

Table 3: Gain from Conservation Strategies by Duration for a Whole Life Policy

Gain from Conservation Strategies Per Thousand for Whole Life Policies

It is worthwhile to notice the gain from conservation strategies for a large number of whole

life policies, because whole life policies are commonly purchased by policyholders. For a newly

issued (at duration 0) whole life policy, developing conservation strategies to retain policyholders

can generate a gain per 1,000 as $4.2. For a group of similar policies, this gain will exceed what is

needed to implement conservation strategies, illustrating the benefits of conservation strategies.

Table 4: Gain from Conservation Strategies Per Thousand for a Whole Life Policy
 Zhang 16
Gain from Conservation Strategies by Term Length

With the same duration and all other constant inputs, the gains from conservation strategies

will increase if the term length increases.

Table 5: Relationship between Term Length and Gain from Conservation Strategies of Life Insurance Policies

For instance, for new-issued policies, i.e. 0-year duration, the gain from implementing

conservation strategies to bring the 10% lapse rate down to 0 for a $100,000 policy is $92.44 for

a 15-Year Term Life policy, and 46 times more ($4223.03) for a Whole Life policy. The table

below illustrates the trend of gain from conservation strategies for three types of life policies

discussed in this paper at duration 0, 5, and 10.

This trend shows that it is more beneficial to introduce conservation strategies to decrease

the lapse rate for longer term length policies. When a policy has longer term length, it also has

more time at the beginning to generate a positive gain from lowering the lapse rate.
 Zhang 17

5. Proposed Policyholder Retention Strategies

5.1 Actuarial Perspective

The actuarial perspective of policyholder retention strategies will help the insurance

company to manage their financial risks, since the actuarial analysis done in previous sections

provides the results of how much gain the company will earn at different durations across a range

of products. It is commonly known that managing financial risks is one of the top priorities of

companies. Insurance companies will be more prepared if they can model and estimate the right

time to implement conservation strategies on particular types of insurance products. Three

strategies can be applied from an actuarial perspective:

1) Implementing conservation strategies at the early stage is essential

Conservation strategies to retain policyholders are beneficial in increasing its

overall economic gain, especially at early stages. At the beginning of each policy, when a

policyholder just purchased it, the insurance company has to pay out acquisition cost and

other compulsory expenses, and consistent premiums paid by policyholders in the future

are necessary for insurance companies to earn profits in a long-term.

2) Companies should focus more on policies with longer term length

For policies with longer term length, insurance companies will have more time to

collect premiums. From the analysis above, the longer the term length of a life insurance

policy, the larger the gain generated from conservation strategies are generated.

3) The effect of conservation strategies diminishes at a later stage

At later durations, it is not necessary to control the lapses. From a study conducted

by the SOA, the highest lapse rate occurs in the first year and decreases most significantly

in the first three policy years (Shaughnessy & Tewksbury 19).

 Zhang 18

Table 6: Current Study (2009-2013) versus Prior Study (2007-2009) of Policy Lapse Rate by Policy Year

Besides, when the gain from conservation strategies becomes negative, lapses are

no longer a cost. Therefore, insurance companies will no longer benefit from implementing

conservation strategies to control lapses.

5.2 Business Perspective

The actuarial perspective provides a foundation to develop policyholder retention strategies

with financial modeling. Due to the current economic situation with low interest rate and

investment yield, insurance companies should know the importance of managing their non-

financial risks to achieve cost efficiency. According to an article published by McKinsey &

Company, non-financial risks (operational risks) are a second critically important risk type that

might be largely overlooked (Buehler, Carpineti, Michel-Kerjan, Nauck & Serino). Operational

risks, such as critical misconduct and cyber-attacks, have an impact on daily business operations.

Hence, building policyholder retention strategies from a business perspective together with

actuarial analysis will help companies to obtain better economic gains and reduce both financial

and non-financial risks to a greater extent.

 Zhang 19
1) Risk Management Team

The risk management team conducts risk assessment on all policyholders when they

purchase a policy. It is important to closely monitor and update the process of risk

classification, because individuals who are expected to have the same cost should be

grouped together. The more accurate the risk classification is, the easier it is for the

management team to implement conservation strategies to certain targeted groups.

2) Information Technology (IT) Department

The IT department processes the demographics and data of policyholders. To

develop conservation strategies, the IT department should automate its system of

processing data and delivering results. The performance of policyholders should also be

captured in the system, so it will be easier to track and follow-up with certain groups that

need conservation strategies to control the lapse rate.

3) Customer Call Service Center

When there are customers complaining about insurance agents or policies, call-

center representatives should indicate these policyholders in the system for follow-up

purposes. Complaint management is also useful in identifying policyholders with high

economic gain who are likely to have issues with their policies and may potentially drop

out.

Since it is important to manage the lapse rate at early durations, the call center can

generate a list of new policyholders or policyholders who are at their early durations. It

will be helpful for call center representatives to perform conservation strategies to retain

policyholders, as they can reach out to those policyholders, particularly those with high

economic gain, to check if they have any questions or show their concerns in general.
 Zhang 20

6. Conclusion

In conclusion, in this paper, the cost of a lapse is evaluated as the gain from developing

conservation strategies to retain policyholders, and it is mathematically quantified as the difference

in economic gain at 0% lapse rate and 10% lapse rate. The implications of policyholder retention

strategies are analyzed from both an actuarial perspective and a business perspective. As there are

many other ways to quantify the cost of a lapse and how it can affect an insurance company’s

profitability, it is undeniable that controlling the lapse rate and policyholders is important to

insurance companies. Conservations strategies are used to help achieve this goal in different ways.

There are further improvements that can be made to the modeling used in this paper. The modeling

can be more dynamic if a feature of risk classification is added as an input. R may also be used to

run 20,000 scenarios for multiple policies at the same time.

Overall, from calculations in the modeling, the cost of a lapse can be costly, especially in

early durations. Insurance companies should invest in developing policyholder retention strategies,

because these strategies will be beneficial to their overall economic gain, especially from

policyholders who are at early durations. Although people commonly know that retaining

policyholders is important for insurance companies, it is hard to quantify the retention value due

to varying durations and different types of policies. From the modeling and analyses in this paper,

insurance companies can calculate their cost of lapses/gain from conservation strategies, and

prioritize their conservation strategies by ranking each inforce policy by highest to lowest

economic gain. Efforts from different teams and departments in the company are also important to

support and boost the gain calculated from the actuarial modeling.
 Zhang 21

Works Cited

Anderson, J. F., & Brown, R. L. (2005). Risk and Assurance. Education and Examination

Committee of the Society of Actuaries. https://www.soa.org/globalassets/assets/files/edu/P-

21-05.pdf

Buehler, K., Carpineti, M., Michel-Kerjan, E., Nauck, F., & Serino, L. (2019, November). The

Value of Insurers in Better Management of Nonfinancial Risk. McKinsey & Company.

https://www.mckinsey.com/business-functions/risk/our-insights/the-value-for-insurers-in-

better-management-of-nonfinancial-risk

KPMG. (2018, April). Importance and Key Benefits of Life Insurance and Private Pensions.

KPMG Global. https://assets.kpmg/content/dam/kpmg/ro/pdf/2018/insurance_engleza_web

.pdf

Smith, M., & Hayhoe, C. R. (2005). Life Insurance: The Different Types of Policies. Publications

and Educational Resources | VCE Publications 354-143 | Virginia Tech.

https://www.pubs.ext.vt.edu/content/dam/pubs_ext_vt_edu/354/354-143/354-143_pdf.pdf

Shaughnessy, M., & Tewksbury, K. (2019). U.S. Individual Life Insurance Persistency: A Joint

Study Sponsored by the Society of Actuaries and LIMRA. The Society of Actuaries (SOA).

https://www.soa.org/globalassets/assets/files/resources/research-report/2019/2009-13-us-

ind-life-persistency-update-report.pdf

The Insurance Information Institute (The III). (2019). 2019 Insurance Fact Book.

https://www.iii.org/sites/default/files/docs/pdf/insurance_factbook_2019.pdf

Whitney, A. W. The Place of Conservation in Insurance. The Casualty Actuarial Society.

https://www.casact.org/pubs/proceed/proceed30/30231.pdf
 Zhang 22

Appendix

1 Assumptions and Notations

1. Lapse rate: l
2. Discount rate: v
3. Net Premium: P

4. Gross Premium: G
5. Death Benefit: B
6. Reserve at time k: k Vx
7. n years term product with t duration years

8. Evaluate at the begin of year t + 1

9. Calculate future cash flows, prospective evaluation.
10. Net premium reserve is calculated traditionally.

In one year,
• Probability of lapse: ↵

• Probability of alive: (1 ↵)px = px

• Probability of death: qx

2 Calculation of the Economic Gain

Everything below is standing at the beginning of year t + 1 to see a n years term product with t years of
duration.

1. Death Benefit is paid when the policyholder dies. The expected payment to death benefit is:

E[DB] = B ⇤ (v qx+t + v 2 px+t qx+t+1 + ...)

nX
t 1
= B(v )k+1 k| qx+t
k=0

2. Expected gross premiums collected is :

E[GP ] = G ⇤ (1 + v px+t + v 2 2
2 px+t + ...)
nX
t 1
= G(v )k k px+t
k=0

1
 Zhang 23
3. Net premium reserve is paid if lapse. The reserve is calculated prospectively. Expected payment for
Lapse Benefit is:

E[LB] = t+1 Vx v↵ + t+2 Vx v 2 (1 ↵)px+t ↵ + t+3 Vx v 3 (1 ↵)px+t (1 ↵)px+t+1 ↵ + ...

2 3 2
= t+1 Vx v↵ + t+2 Vx v px+t ↵ + t+3 Vx v 2 px+t ↵ + ...
↵
= [t+1 Vx (v ) + t+2 Vx (v )2 px+t + ...]
n t
↵X
= t+k Vx (v )k k 1 px+t
k=1

4. Reserves are calculated using recursive formula:

k+1 Vx = (k Vx + P )(1 + i) (Bk+1 k+1 Vx )qx+k

5. Economic Gain: (Accumulated Value = AV, Present Value = PV)

Economic Gain = AV [P ast P remiums] + P V [F uture P remiums]

AV [Acquisition Costs]
P V [Surrender Charge]
P V [DeathBenef its]
where surrender charge is assumed to be the net premium reserve when it lapses.