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Chia-Chun Chiang, University of Texas at El Paso; Greg Niehaus, University of South Carolina
Compared to surrendering a policy, we show that taking out a policy loan can be a less costly way for policyholders to protect their cash value from insurer insolvencies, especially for policyholders with cash values in excess of the state’s guaranty amount. Consistent with this argument, we find that life insurance policyholders’ demand for policy loans increases when the insurer’s financial strength declines. In addition, the relationship between policy loans and insurer financial strength is stronger during the financial crisis. It indicates an increased customer awareness of, and/or sensitivity to, the insolvency risk of financial institutions during the crisis. The analysis shows that policy loans are another mechanism that can provide market discipline to life insurers.
