Terminating Existing Coverage
When long term care insurance companies price insurance products they will often include a lapse ratio or a percentage of individuals who will terminate their policies before they become eligible to receive benefits. The premium from lapsed policies is pure profit for an insurance carrier, and helps in lowering the premium cost to other policy holders.
For example, if an insurance company covers 100,000 individuals, and they assume five percent of those individuals will terminate their coverage before receiving any benefits, then whatever those 5,000 people paid for coverage becomes revenue. That revenue can then be used to offset the cost to the other 95,000 people. But, if a carrier assumes a five percent lapse ratio and only two percent of the policies are lapsed, the cost of coverage must increase for the entire pool in order to provide the same benefits.
