by John Darer CLU ChFC MSSC RSP CLTC
Sun Life's pulling out from the No Lapse guarantee UL market represents the second major life insurer to jettison the popular product in the past couple of years. In early 2009 AXA Equitable stopped offering the product.
No Lapse guarantee UL came onto the market as a solution to those who had a long term or permanent insurance need but were turned off by the premiums of whole life. The early version of Universal Life was a popular alternative to whole life in the 1980s when interest rates were high as policy "buckets" were credited with "New Money" rates. It was thought that the new money crediting rate would facilitate a more flexible response to assumed increasing rates. The portfolio rate offered by many mutual insurers at the time was posited by UL purveyors as being more slow to respond. The policies also offered the undisciplined flexibility to pay premiums or not, provided that there was enough cash in the policy "bucket" to pay non guaranteed expense and mortality charges.
As interest rates began to fall in the late 1980s-early 1990s, policyholders began to experience cash calls when their policy "bucket" from which expenses and mortality charges are withdrawn shrunk. Some older insureds faced huge cash calls as the perfect storm of lower interest rates combined with increasing age related mortality charges accelerated the drain. A number of policyholders sued their agents alleging that the risk was not adequately disclosed. Enter no lapse guarantee UL
No lapse guarantee UL permitted an insured to know the minimum premium they had to pay to keep the policy in force even if the cash value dwindled to zero. The contract was contractually guaranteed not to lapse provided the minimum premium was paid. The initial product offerings provided such guarantees for a limited period of time. In recent years the no lapse guarantees were available until as long as age 120.
Our sources tell us that insurers made hopeful actuarial assumptions that interest rates would increase and have been squeezed when they have actually drifted lower. AXA's moment of clarity was embodied in a withdrawal from the market was swift and abrupt, even ditching cases that were in underwriting. I should know. I had one of those cases!
The low interest rate scenario is also meddling with insurers' assumptions used to set long guarantee period term insurance pricing.
All of this will impact consumers in a negative way as prices eventually adjust for new issues. For the moment No Lapse guarantee universal is still available, just from fewer life insurers and at higher prices.