No-Lapse Premium Guarantee Policies: The Risks Revealed

by Peter Katt

In a column last year, I discussed universal life policies with no-lapse secondary guarantees. I referred to them as “no-lapse premium guarantee” (NLPG) policies [“The Potential Problems With No-Lapse Premium Guarantees,” July 2003].

These policies have very exaggerated guarantees and most likely rely on policy lapses to provide a margin of safety for the companies selling them. If the companies don’t get the number of lapses they have anticipated and interest rates don’t soar, these policies won’t be profitable for the companies selling them. This is especially true for the most aggressively priced NLPGs.

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Last year, the only coverage I saw about these kinds of policies appeared to be press releases from the companies themselves touting their wonders. I spent time lobbying other influential life insurance voices to join me in a critical analysis of NLPGs because it appeared that they were (and are) dominating new and replacement policy sales. It continues to be my opinion that understanding the solvency implications connected to NLPGs is by far the most important issue in the life insurance world.

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