Meeting the demand for certainty

The evolution of no-lapse guarantee whole life models in the US as
a response to the need to maximise death benefits while providing a
level, guaranteed, moderate premium was long overdue, given
policyholder complaints over inadequate funding and the inability
to carry the coverage to normal life expectancy.

No-lapse guarantees come with a huge caveat, though: the policies
have neither guaranteed nor projected cash accumulation.

Part of the appeal of no-lapse guarantees is their simplicity – to
the policyholder, at least. If a stipulated premium is paid within
a specified time period, the premium and the death benefit are
guaranteed even if the insured lives beyond age 100 and the cash
value falls to or below zero.

The guarantee comes with stringent time limits and “catch up”
provisions for payment of premium in order to protect the lifetime
guarantee.

The death benefit guarantee is typically structured as an
‘account-based’ guarantee. The life insurance company maintains a
so-called a ‘shadow account’. The shadow account mimics the actual
processing of the contract fund just as though the premiums were
deposited, the charges deducted, and interest credited.

However, the charges and interest are typically different than
those applicable to the actual contract fund. The death benefit
guarantee will be in effect as long as the shadow account is
positive.

The shadow account is essentially treated as a hypothetical policy
with different policy assumptions for interest and charges. The
assumptions may be more or less favourable than those applicable to
the actual policy. For purposes of determining the “shadow account”
value, these assumptions are guaranteed.

Some providers add liquidity riders, which provide for a return of
premium (up to 100 percent in some cases) after 20 years if the
policy is surrendered. The policies must be issued before the
insured turns 65, and the policyholder must also be at least a
standard risk.

The guarantees come with a few stipulations. A late premium would
void the guarantee and the policy would be left to sink or swim
with its beleaguered cash values. A policy loan, a withdrawal of
cash, or the payment of a smaller premium would typically void the
guarantee or result in the guarantee dropping to less than a
lifetime guarantee, for example, age 85.

Without the guarantee, the policyholder could be faced with higher
non-guaranteed premiums, which would be burdened with unsubsidised
mortality expense costs and the possibly lower crediting rate than
would be present in a policy without the no-lapse guarantee.

A no-lapse guarantee policy may permit a make-up contribution, such
as a payment of late premiums plus interest, but the make-up
periods are typically short, from one to two years.

MetLife’s new no-lapse product offers enhanced flexibility with
guaranteed protection through customisable durations of coverage
and premium payments, as well as design innovations that allow
policyholders to create a policy that meets their needs. The
policy’s optional coverage continuation rider features a secondary
no-lapse guarantee that coverage will remain in force, even if the
cash value has been reduced to zero.

MetLife has raised the bar by adding an optional, patent-pending
guaranteed survivor income benefit rider. The rider pays death
proceeds in the form of an enhanced monthly income rather than a
lump sum payment, providing beneficiaries with a guaranteed monthly
income they will never outlive.

More than a few companies are now touting no-lapse contracts that
build up cash values. Some provide basic cash value growth; some
provide a return-of-premium type provision with up to 100 percent
of premium paid available on full surrender; and others provide
solid cash-value growth, either in early or later durations.

The difference is that now policyholders earn current rates of
interest on their cash value. In the past, if interest rates
declined, the insured individuals would have had to kick in extra
premiums to keep the policy in force. The no-lapse guarantee
protects the insured against this problem. It doesn’t cost extra,
but it does require a specified premium to be paid for a specified
period.

AIG American General added new no-lapse features to its popular AIG
ContinUL Extend, a universal life insurance product underwritten by
American General Life Insurance Company and The United States Life
Insurance Company in the City of New York, subsidiaries of American
International Group.

AIG ContinUL Extend offers guaranteed death benefits to any age or
duration, even if the cash value of the policy falls to zero. In
addition, the policy has a no-lapse guarantee, meaning as long as
the policy owner pays the monthly guarantee premium then the policy
is guaranteed not to lapse.

Policy owners have the option to pay additional premiums to build
more accumulation value and can decide to increase or decrease
their death benefit to fit their changing needs. And because it is
not always possible to make premium payments when they are due,
customers still enjoy a flexible payment schedule with a 28-day
window to make their premium payments and maintain their guaranteed
death benefit.

All this upside comes with some serious complications, however, and
insurers are quick to add that no-lapse guarantees aren’t for
everyone. No-lapse guaranteed premiums are severely lower than
conventional guarantees.

One way of expressing this difference is that participating whole
life guaranteed premiums are generally two to two-and-a-half times
larger than no-lapse guarantees. For example, according to broker
Accuquote a representative no-lapse guaranteed premium for a
preferred male, age 60 ($1 million death benefit), is $16,976,
whereas a representative participating whole life guaranteed
premium is $37,410.

With mortality rates steadily climbing and whole life prices
falling, no-lapse guarantees are an attractive way to capture the
attention of policyholders in search of protection that will
outlive them.