Lapse Protection Feature Guarantees Peace Of Mind

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Peace of mind. Ultimately, thats whats being sold in the life insurance business. And when youre talking about universal life insurance, nothing guarantees peace of mind better than lapse protection.

Whether its UL or variable universal life, todays clients are looking for protection they can count on–without any surprises. Thats where lapse protection comes in.

As a producer, you know there are many factors affecting a UL contracts performance. Erratic premium payments, increasing costs of insurance, and volatile interest rates could erode values. This could cause a policy to under-perform or, at worst, potentially collapse at some later datean outcome that clients too often forget can happen.

With that in mind, we believe guaranteed lapse protection is your best bet for ensuring there are no surprises to you or your client. This article will cover how the feature came about, how it works, and what happens when it needs to be executed.

When interest rates were high in the 1980s, UL was great. However, when rates dipped in the 1990s, the products interest-sensitive downside became a reality and, in some cases, unless additional premiums were deposited, policy values eroded to the point where some contracts began collapsing.

This prompted insurers to begin offering lapse protection provisions with their new UL contracts. These features protect policyowners from the adverse consequences that can result from increasing cost of insurance charges and decreasing interest rates. As long as the policyowners do their parti.e., pay the required minimum premiums–the provisions guarantee the policy death benefit will remain in force, no matter how low the account value falls.

The provisions may differ slightly from one another, but most share these basics:

  • Selected at issue, typically for an additional charge or minimum premium requirement, the feature guarantees coverage for a certain period of time–as long as the premiums are paid in full and on time, and no policy loans or partial withdrawals are taken.
  • The ULs protection typically runs to age 100 or beyond for a lifetime guarantee. (In a VUL, the lapse protection is typically guaranteed for a fixed period such as 10 or 20 years.)
  • Once in place, if costs of insurance are higher or policy yields are lower than projected, the lapse protection feature guarantees the policy will remain in force for the guaranteed period. The risk of rising costs of insurance and plummeting market returns fall back into the lap of the insurer.

When selling a UL policy, you routinely show your clients the current, mid-point and guaranteed assumptions in the policy illustrations. In our view, this is also the best time to emphasize how sensitive policy performance can be–and why including lapse protection is a wise choice.

To do this, point out that, if, based on future results, the account value of the UL or VUL reaches zero, the contract will become at risk for lapsing.

You might also mention that, depending on the product design, insurers can run two types of lapse protection to determine if the policy should remain in force. (See sidebar).

If the answer to either test is “no,” the policyowner is typically allowed to restore the lapse protection by depositing additional premium under terms of the contracts “catch-up” provision. (Of course, this gets more expensive the longer the owner waits to make up payments.)

Todays consumers have greater flexibility than ever to customize fixed interest and VUL protection to their needs. And, by incorporating lapse protection, they can be ensured the death benefit will remain safely in place, giving them the peace of mind they expect from a sound UL policy.

Len Scholl (pictured) is assistant vice president- universal products, and Randi Sterrn is vice president-variable life products at Sun Life Financial, Wellesley Hills, Mass. Their respective e-mail addresses are len.scholl@sunlife.com and
randi.sterrn@sunlife.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, July 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.