Lapse Rate: The percentage of policies that terminate with no value or are voluntarily surrendered each year. Because insurers typically lose money on a statutory basis in the first year a policy is in force (i.e., their mortality, reserve, expense, sales compensation, and underwriting costs are greater than the premiums they receive), they rely on renewal premiums to repay these initial costs. In most cases, if lapse rates are greater than expected, the insurer will either not recoup or delay the recoupment of its initial excess expenses. An insurer with a low lapse rate, everything else being equal, can price its policies more competitively because it will have more margins available from the greater renewal premiums.
Life Expectancy: The actuarially projected period of time a person is expected to live. Life expectancies are averages based on factors such as gender and current age of an individual. Although illustrations may sometimes be provided for durations only up to life expectancy, roughly half the population would be expected to live beyond life expectancy.
Liquidity Ratio: The cash surrender value for a given policy year divided by the cumulative premiums paid through the end of that policy year.