No Lapse Guarantee (NLG) policies, or policies with NLG riders are attractive to some insureds. Many of these Guaranteed policies were issued by a number of carriers since the early 2000’s. The premise is that as long as the premium is paid on time each year, the death benefit is guaranteed. Thus, many insureds, advisors, and trustees are under the impression that these policies do not require ongoing review. This is an incorrect notion, and the following case study will show one reason why.
NLEC was recently asked to review a $5m Survivor (2nd to Die) policy. The policy was acquired in April 2001, with an annual premium of $39,634. The crediting rate in the cash value account was 6.30% at the time of acquisition. The Guaranteed duration of the policy was to ages 105/100 for the husband and wife, as long as the premiums were paid timely.
When NLEC initially reviewed the policy, we discovered that the no lapse rider was no longer in effect because the insured had transposed numbers on the most recent premium payment. Instead of paying $39,634, the client had paid
$39,364…a shortfall of $270.
What was the result? Instead of a Guaranteed duration to ages 105/100, the policy’s duration was now to ages 94/89 (an 11 year difference!) Why did this occur? The primary factor involved here is the fact that the no lapse rider was impaired due to a seemingly small error – an underpayment of only $270. Additionally over the past 13 years, the crediting rate in the cash value account had decreased from 6.30% to the guaranteed minimum floor of 4%. In other words, without the Guarantee rider attached to the policy, the cash value account was not sufficient to support the original duration of the policy. So despite the fact that the insured had paid over $500k into the policy, a simple transposition of numbers had impacted the Guarantee severely. Neither the original agent who placed the policy, nor the insured was aware of the error. This was a function of a lack of reporting and ongoing review of the policy, which had never taken place.
So what is the lesson? Very few carriers notify the policy owner if the guarantee has been adversely impacted. Therefore, these types of policies should not be treated like a bucket item list; once they are acquired it can be checked off the list and forgotten. We learned that policy guarantees are based on certain factors that must occur within a specified time period. So in this case, it’s really guaranteed…IF. If the insured pays the correct amount of premium and on time, then the guarantee should remain in place. Other factors that can negatively impact the guarantees include paying premiums too early, too late, taking loans from the policy, and making changes to the death benefit.
What should be done on a go forward basis on all policies with premium based Guarantees? NLEC’s procedure is to send premium reminder notices 60 and 15 days in advance. Each year after the policy anniversary date, we request confirmation from the carrier that the guarantee remains in place. Adherence to these procedures will provide the reporting safety net necessary to protect the client’s long term interests.
No Lapse Guarantee policies are extremely rigid and unforgiving in their design. As a result, clients are often making an irrevocable decision when they acquire them. Before doing so, we suggest thinking about the need for future flexibility as one’s circumstances, objectives and estate plan will change over time. Since these policies are very inflexible, careful consideration should be given during the decision making phase to determine IF it is a fit. If your plan is going to change, shouldn’t your life insurance be designed with the ability to change with it?