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Deciding Whether a Life Insurance Contract Should Be Reinstated

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  • Hong Mao
  • Krzystof M. Ostraszewski
  • Yuling Wang

Abstract

In this article, a process for deciding whether a life insurance contract should be reinstated is proposed. The present values of net premium of two alternatives are calculated and compared. Our analysis shows that reinstatement of the original policy is not always beneficial. When the holding time of insurance policy before lapse is longer, reinstatement is more favorable, under the assumption of a constant interest rate. However, when the valuation interest rate is a stochastic process, buying a new policy is better than reinstatement of the original one if the equilibrium interest rate and the holding time of insurance policy before lapse have small values; otherwise, reinstatement of the original policy is better.

Suggested Citation

  • Hong Mao & Krzystof M. Ostraszewski & Yuling Wang, 2011. "Deciding Whether a Life Insurance Contract Should Be Reinstated," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 34(1), pages 1-17.
  • Handle: RePEc:wri:journl:v:34:y:2011:i:1:p:1-17
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