A no lapse guarantee life insurance is a variable universal life insurance policy in which, if the accumulation of the premiums paid at any point in time (minus policy loans, and withdrawals) equals or exceeds the minimum premiums due at that point in time, the policy is prevented from lapsing. This lapse prevention is guaranteed regardless of the underlying portfolio return or policy changes. When you are buying a no lapse life insurance policy, keep in mind that most no lapse policies have little, and possibly no, cash value, in comparison to high cash values which the best traditional whole life policies have.
States have specific requirements for a no lapse life insurance policy. Although these requirements vary from state to state, most states have certain requirements which are common to all. A disclosure statement must be provided that the policy value at the end of the no-lapse guarantee period may be insufficient to keep the policy in force unless an additional payment is made at that time. The disclosure statement must appear in the no-lapse guarantee provision. This disclosure statement is not required when the no- lapse guarantee period extends to the end of the contract. There must not be a separate additional premium and/or a monthly cost for the no lapse guarantee provision that is in the policy or in a rider that will always be attached. A separate additional premium and/or a monthly cost for the no lapse guarantee provision is required for an optional rider. The grace period provision must address payment of the minimum amount required to keep the policy in force. The no-lapse provision must provide a grace period for the policy owner to pay any premiums to keep the no-lapse provision from terminating. A grace period for the no-lapse provision is not required if the provision offers an unlimited time in which to pay sufficient premiums to meet no-lapse requirements. The no-lapse provision must state that written notice will be provided to the policy owner if premiums paid are insufficient to maintain the no-lapse guarantee. All no-lapse guarantee periods must be set forth in the policy. The no-lapse provision must state that as long as the cash surrender value is sufficient to pay for the monthly deduction, the contract will not lapse even if the no-lapse guarantee has lapsed. The no-lapse provision must clearly define the policy benefit(s) available during the no-lapse period(s). The no-lapse guaranteed premium may be adjusted for policy changes – increases or decreases in the specified amount, death benefit option changes, or addition of any riders.
The no-lapse guarantee provision may be terminated due to changes to the contract, such as death benefit option changes, specified amount increases or decreases, addition of any riders, or indebtedness. However, proper disclosure must be made to the owner:
- when the contract is issued and
- when such changes are made to the policy.
Alternatively, policy provisions such as death benefit option changes, specified amount increases or decreases, addition of any riders, or indebtedness cannot be limited, disallowed, or affected due to the existence of the no-lapse guarantee provision and/or rider.
