In the almost 15 years we have been managing life insurance policies, we have never encountered a situation where a life insurance carrier volunteered to give back money due to a death benefit no-lapse guarantee. You can make a surrender and get it back, or take a loan or withdrawal on your policy to get some cash, but at a cost.
Recently a carrier sent us a letter telling us that a client could get back over $200 thousand and still have their policy death benefit intact and guaranteed for life. This was the result of a death benefit no-lapse guarantee.
Some universal life policies come with a death benefit no-lapse guarantee. As long as a client pays a specific premium in full and on time, the policy death benefit is guaranteed no matter what happens in the market. These policies gained favor after previous universal life policies without guarantees underperformed (and even lapsed) because of the low-interest-rate environment.
The policies typically develop little cash value but provide economically efficient coverage. They became very popular in the trust-owned life insurance (TOLI) market, where the rate of return of cash value means little – the focus is on the rate of return of the death benefit.
Death Benefit No-Lapse Guarantee Policies
Initially, though, you had to pay a specific premium in full and on time each year, or you would compromise or lose the policy death benefit guarantees. This was simple to track if one sold the policy with a set annual premium until the insured’s death, but insurers designed some policies as “short pays” with premium payment for a limited number of years. Insurers jump-started others with cash from another policy. In both situations, it was not as easy to track. We also suspect that carriers may also have some issues tracking this.
But one carrier can track it. They reviewed their block of policies with no-lapse guarantees, determined which policies had paid more than the amount needed to guarantee the death benefit, and reached out to their clients to tell them they had overpaid.
The letters informed policy owners that the carrier that had “discovered” their policy “was funded to the point where no further premium payments were required for the policy to remain permanently in force. ” They had “paid premium(s) beyond the amount needed to attain a lifetime No Lapse Guarantee.”
We were in the process of onboarding a new ITM TOLImonitor client, and gathering the information that we need to calibrate the policy, when we received one of these letters.
Our client was thrilled to find out that the trust would be receiving a check for $218,972.00 and that even after the “refund,” the policy death benefit would be guaranteed for life. The refund was processed within 10 business days, received by the trust and ITM remediation confirmed there were no changes to the guaranteed duration or death benefit amounts.